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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-06590
[COX COMMUNICATIONS LOGO APPEARS HERE]
COMMUNICATIONS
COX COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2112281
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 LAKE HEARN DRIVE, ATLANTA, GEORGIA 30319
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 843-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Class A Common Stock, $1.00 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENTS TO
THIS FORM 10-K. [ ]
AS OF MARCH 6, 1997, THE AGGREGATE MARKET VALUE OF THE CLASS A COMMON STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT WAS $1,438,696,301 BASED ON THE CLOSING
PRICE ON THE NEW YORK STOCK EXCHANGE ON SUCH DATE.
THERE WERE 256,511,695 SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF MARCH 6,
1997.
THERE WERE 13,798,896 SHARES OF CLASS C COMMON STOCK OUTSTANDING AS OF MARCH 6,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Stockholders are incorporated by reference
into Parts I and II. Portions of the Proxy Statement for the 1997 Annual Meeting
of Stockholders are incorporated by reference into Part III.
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COX COMMUNICATIONS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 36
Item 3. Legal Proceedings........................................................................... 37
Item 4. Submission of Matters to a Vote of Security Holders......................................... 37
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 37
Item 6. Selected Financial Data..................................................................... 37
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................. 38
Item 8. Financial Statements and Supplementary Data................................................. 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................................. 38
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 38
Item 11. Executive Compensation...................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 38
Item 13. Certain Relationships and Related Transactions.............................................. 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 39
SIGNATURES.............................................................................................. 42
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PART I
ITEM 1. BUSINESS
Cox Communications, Inc. ("Cox") is the fifth largest operator of cable
television systems in the United States and is a fully integrated, diversified
media and broadband communications company with operations and investments in
three related areas: (i) U.S. broadband networks; (ii) cable television
programming; and (iii) United Kingdom ("U.K.") broadband networks.
Cox is an indirect 75.2% owned subsidiary of Cox Enterprises, Inc. ("CEI").
CEI, a privately-held corporation headquartered in Atlanta, Georgia, is one of
the largest media companies in the United States with consolidated revenues in
1996 of $4.6 billion. CEI, which has a 98-year history in the media and
communications industry, publishes 18 daily newspapers and owns or operates 11
television stations in addition to its interest in Cox. Through its majority-
owned subsidiary Cox Radio, Inc., CEI owns or operates 22 radio broadcast
stations. Through Manheim Auctions, CEI is also the world's largest operator of
auto auctions.
Cox's business strategy is the development and implementation of new services
for its customers by capitalizing on its highly clustered cable television
systems, its industry leading position in upgrading the technological
capabilities of its broadband networks and its commitment to customer service.
Cox believes that an integrated package of existing multichannel video and new
services, such as enhanced video, high-speed Internet access and telephony,
including personal communication services ("PCS"), will enhance Cox's ability to
acquire and retain customers while increasing revenues per customer.
In addition, Cox has sought to utilize its expertise and position as one of
the nation's premier cable television companies to invest in programming,
telecommunications and technology companies which are complementary to Cox's
business strategy. Cox believes that these investments have contributed
substantially to the growth of its core broadband communications business and
that its leadership position in broadband communications has facilitated the
growth of these investments. Cox seeks to utilize insights gained from the
integrated operations of its cable television systems and related programming,
telecommunications and technology investments to continue its leadership in the
broadband communications industry by anticipating and capitalizing upon long-
term industry trends.
U.S. BROADBAND NETWORKS
BUSINESS STRATEGY
Cox's strategy for its U.S. broadband network is to capitalize on the strength
of its current cable television business to provide customers with an integrated
package of existing multichannel video and new services, including enhanced
video, high-speed Internet access and telephony, including PCS. Cox believes
that the long-term competitive advantages of clustering, its aggressive
investment in the technological capabilities of its broadband network and its
commitment to customer service will enhance Cox's ability to acquire and retain
customers while increasing revenues per customer in a competitive environment.
CLUSTERING. As an integral part of its broadband communications strategy, Cox
has continually sought the advantages and efficiencies of operating large cable
television clusters. Including the effects of the exchanges of cable television
systems in the first quarter of 1997, approximately 82% of Cox's customers will
be served by Cox's nine largest clusters. These nine clusters will average over
300,000 customers each. See "-- Cable Television Business -- Operating Data."
Communities served by Cox's systems have an average household income of
approximately $40,000, versus the national average of $33,500. Large cable
television clusters enable Cox to reduce expenses through the consolidation of
marketing and support functions and to place more experienced management teams
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at the system level who are better equipped to meet the new regulatory and
competitive challenges of today's telecommunications industry. Large operating
clusters will also increase the speed and effectiveness of Cox's new product and
services deployment, enhancing its ability to increase both customers and
revenues.
Cox has and will continue to make strategic acquisitions of contiguous cable
television systems to create and expand large clusters, while disposing of cable
operations in non-strategic regions. In the past year, Cox has made the
following acquisitions and exchanges of cable television systems:
In January 1996, Cox acquired a cable television system serving approximately
51,000 customers in Newport News, Virginia, for approximately $122.3 million.
Cox operates this system as part of its cluster in Hampton Roads, Virginia.
In April 1996, Cox exchanged its Williamsport, Pennsylvania cable television
system serving approximately 24,500 customers for $13 million and an East
Providence, Rhode Island system serving approximately 15,500 customers.
In January 1997, Cox and Tele-Communications, Inc. ("TCI") exchanged certain
cable television systems with the result that Cox increased the size of its
existing clusters in Hampton Roads, Phoenix, New Orleans, Rhode Island, and
Omaha and disposed of several non-strategic cable television systems. Cox and
TCI each exchanged more than 300,000 customers.
In January 1997, Cox exchanged its western Massachusetts cable television
systems serving approximately 48,000 customers for Continental Cablevision's
James City and York County, Virginia and Pawtucket, Rhode Island systems serving
approximately 49,000 customers.
In March 1997, Cox exchanged its Myrtle Beach, South Carolina cable television
system serving approximately 42,000 customers for Time Warner's Hampton and
Williamsburg, Virginia systems serving approximately 45,000 customers. This
transaction also included a Texas cable television system serving approximately
7,000 customers which was purchased by Cox and immediately traded to Time
Warner.
Through the exchanges set forth above, Cox has increased the approximate size
of its Phoenix cluster 15% to 513,000 customers, its New England cluster 97% to
410,000 customers, its Hampton Roads cluster 46% to 383,000 customers, its New
Orleans cluster 7% to 271,000 customers and its Omaha cluster 41% to 149,000
customers.
TECHNOLOGY AND CAPITAL IMPROVEMENTS. Cox emphasizes high technical standards
for its cable television clusters. Cox continues to deploy fiber optic cable
and to upgrade the technical quality of its hybrid fiber-coaxial ("HFC")
broadband network. The result is a significant increase in channel capacity,
facilitating the delivery of additional programming and services such as
enhanced video, high-speed Internet access and telephony, including PCS. Cox's
aggressive investment in its broadband network upgrade will allow it to offer
these services more quickly, increasing revenues and cash flows.
Cox strives to maintain the highest technological standards in the industry.
Cox's U.S. cable television systems have bandwidth capacities ranging from
400MHz to 750MHz, which permits carriage of 54 to 112 analog channels. At the
end of 1996, approximately 93% of Cox's network had at least 54-channel
capacity, and 100% of its cable television subscribers were served by
addressable technology. Cox anticipates that approximately 87% of its customers
will be served by broadband networks with at least 78 analog channels of
capacity by the end of 1998. In Cox's nine largest systems, by the end of 1997,
75% of its customers will have access to 550MHz or 750 MHz capacity and 2
million customers will be able to receive two-way services.
In addition, Cox plans to deploy digital compression converters in several of
its markets by the end of 1997. Digital compression will enable Cox to increase
the channel capacity of its cable television systems to more than 100 channels.
Cox believes that the cable television system upgrades, along with the
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distribution of digital compression technology, will provide its customers with
greater programming diversity, better picture quality, improved reliability, and
enhanced customer service.
In addition to increasing channel capacity, Cox's aggressive investment in
technology has improved the reliability of its service. Cox's HFC broadband
networks had a 99.986% reliability rate in 1996, as measured by average customer
minutes of outage per year, which is comparable to the BellCore standard of
99.989% utilized by the RBOCs. Cox's fiber optic network design of ring-in-ring
architecture provides significant improvements over existing non-ring network
architecture in capability, flexibility, and reliability, without creating
additional cost. Once ring-in-ring architecture is fully deployed, Cox expects
the reliability of its broadband networks to exceed the BellCore standard, which
will afford Cox the opportunity to provide competitive residential telephony and
other communications services in its systems.
All of Cox's cable television systems utilize addressable technology and
approximately 50% of Cox's customers have addressable converters. Addressable
technology enables Cox to control electronically the services delivered to each
customer. Cox can upgrade, downgrade, or disconnect services to an addressable
customer immediately, without the delay or expense of dispatching a technician
to the home. In addition, Cox is able to offer its customers pay-per-view
programming, generally consisting of recently released movies and special
events. Addressable technology also helps Cox reduce pay service theft and is
an effective enforcement tool in the collection of delinquent payments.
CUSTOMER AND COMMUNITY SERVICE. Strong customer service is a key element of
Cox's long-term business strategy to develop and implement new services for its
customers. Cox has always been committed to customer service and has been
recognized by several industry groups as a leader in providing quality customer
service. In 1996, Cox was distinguished by J.D. Power & Associates for achieving
highest overall customer satisfaction among cable television users in the first
study on the cable television industry. Cox outplaced six other leading cable
television companies in all areas impacting customer satisfaction, including:
cost of service, reception quality, programming, corporate image and customer
service and billing. Cox systems have won the "Customer is Key Award" nine
times, more than all other cable companies combined. The award is presented by
CTAM (Cable & Telecommunications: A Marketing Society) for outstanding customer
service in the cable television industry. Cox anticipates that its high level of
customer satisfaction will help it compete more effectively in the delivery of
new services such as enhanced video, high-speed Internet access and telephony,
including PCS, to its customers. Cox places special emphasis on training its
customer contact employees and has developed customer service standards and
programs that exceed national customer service standards developed by the
National Cable Television Association ("NCTA") and the Federal Communications
Commission ("FCC"). Cox also has sought to meet the needs of its customers by
deploying, in many of its U.S. cable television systems, user-friendly
technology such as automatic response units ("ARUs"), automatic number
identification ("ANI") telephone equipment and "impulse" pay-per-view
capability, all of which provide added convenience to customers. The use of
these technologies facilitates the processing of customer inquiries and service
orders and aids in the marketing of existing and new services.
A key element of Cox's community service is enhancing education through the
use of cable technology and programming. Cox currently participates in four
education initiatives. First, Cox participates in a national initiative, Cable
in the Classroom, which offers commercial free programming with lesson plans
free of charge to schools. Second, under the Cox Line to Learning program, Cox
plans to install a cable modem with high-speed Internet access free of charge in
certain schools as it upgrades its broadband network. Third, Cox has
established model technology schools in Chula Vista, California, Omaha,
Nebraska, Warwick, Rhode Island and Norfolk, Virginia, where it is testing
future services, such as interactive fiber optic links to local colleges, to
determine their value in the classroom. Additionally, Cox has established a
Multimedia Academy to train educators, parents, students and community leaders
about the use of multimedia technology as an educational tool.
TELEPHONY. Cox believes that cable television companies are well suited to
take a leading position in the telephony business. Cable television's HFC
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broadband networks have improved significantly in the past five years with the
advent of low-cost broadband fiber optic technology, which has provided the
level of performance and reliability necessary to compete in the evolving
telecommunications market. By providing local telephony services and reselling
long distance services, Cox will access a portion of a revenue market as large
as $180 million for telephony services, which is more than seven times larger
than the existing cable television market. Additionally, Cox owns an interest
in Teleport Communications Group Inc. ("TCGI"), the nation's largest competitive
local exchange carrier. See "--Telephony and High-Speed Internet Access
Businesses -- Teleport Communications Group Inc."
Cox believes in the revenue opportunities of wireless communications. Cox has
been a leader in developing PCS, an advanced, digital, wireless telephone
technology. For its innovative efforts in developing PCS, Cox was awarded a
pioneer preference license for the Los Angeles-San Diego Major Trading Area
("MTA"), an area with a population of more than 21 million. See " -- Telephony
and High-Speed Internet Access Businesses - Cox Communications PCS, L.P." Cox
believes that the use of the HFC broadband network and new digital wireless
technologies will continue to position the cable industry as a viable competitor
for local exchange carrier ("LEC") services.
Additionally, to enhance Cox's entry into this new wireless communications
market, Cox joined TCI, Comcast Corporation ("Comcast") and Sprint Corporation
("Sprint") to create Sprint Spectrum Holding Company L.P. (with its
subsidiaries, "Sprint PCS") with the goal of gaining a significant share of the
wireless communications market. See "--Telephony and High-Speed Internet Access
Businesses -- Sprint PCS." The partners are developing an integrated, national
wireless voice and data system, which the partners will promote using the
"Sprint PCS" brand name and cross-promote with cable services and products
branded by Cox, TCI and Comcast in their respective cable television systems.
SATELLITE TELEVISION. Cox is involved in the business of delivering
television programming via direct broadcast satellite ("DBS"). Cox owns a 10.4%
interest in PrimeStar Partners L.P. ("PrimeStar"), the nation's second-largest
DBS operator with 1.6 million customers as of December 31, 1996. See "-- Other
Telecommunications and Technology Investments - PrimeStar Partners, L.P." In
addition to being an investor in PrimeStar, Cox, as part of its consolidated
operations, currently distributes the PrimeStar service to more than 130,000
customers.
HIGH-SPEED INTERNET ACCESS. The use of computers, online services and the
Internet has increased significantly over the last few years. For example, over
the last ten years the number of Internet hosts has increased from 10,000 to
over 10 million. Cox believes in the revenue opportunities of Internet related
services and is taking advantage of these opportunities by developing and
providing high-speed Internet access and work-at-home services via its advanced
HFC broadband network. By using a cable modem and the broadband network, users
can access the Internet at speeds up to hundreds of times faster than existing
telephone modems. To enhance Cox's entry into the cable based high-speed
Internet access market, Cox acquired an interest in At Home Corporation. See "-
- -Telephony and High-Speed Internet Access Businesses -- @Home." In December
1996, Cox launched high-speed Internet access, offered as Cox @Home Network, in
Orange County, California. Cox plans to introduce the service in additional
markets in 1997.
OTHER ALTERNATIVE REVENUE SOURCES. Implementation of Cox's business strategy
will allow Cox to develop revenue sources ancillary to its core cable
television, telephony and high-speed Internet access businesses. In recent
years, Cox has increasingly generated revenues from additional sources such as
advertising, pay-per-view and home shopping.
Cox derives revenues from the sale of advertising time on satellite-delivered
networks such as ESPN, MTV and CNN. Currently, Cox inserts advertising on
approximately 15 channels in each of its cable television systems. Local cable
television advertising is often more effective and less expensive than
alternative local advertising sources. As such, Cox expects continued strong
growth in this revenue source. In addition, Cox participates in the national
and regional cable television advertising market through its investment in
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National Cable Communications, L.P. ("NCC"), a partnership which represents
cable television companies to advertisers. NCC is the largest representation
firm in spot cable advertising sales.
Cox believes that the growing number of addressable homes, the addition of
channels offering pay-per-view movies and events (such as boxing matches and
concerts) and its increasing pay-per-view marketing expertise will lead to
increases in Cox's pay-per-view revenue stream. In addition, Cox is continuing
its efforts to increase the performance of the pay-per-view sector through the
use of automated phone ordering procedures and preview channels. With future
impulse ordering technology, Cox hopes to further the growth of pay-per-view
services. The implementation of digital compression technology, and the
resulting increase in channel capacity, will give Cox "near video-on-demand"
capabilities, and further increase pay-per-view purchases.
CABLE TELEVISION BUSINESS
Cox's domestic cable television operations represent the core element of its
integrated broadband communications strategy. Including the effects of the
exchanges of cable television systems in the first quarter of 1997, Cox owns and
operates cable television systems organized into 18 locally managed clusters in
13 states. These clusters pass approximately 5.0 million homes and provide
service to approximately 3.2 million customers. The foregoing excludes
approximately 82,500 customers represented by Cox's 50% ownership interest in a
joint venture with Time Warner Entertainment Company, L.P., which owns two
additional cable television systems in Fort Walton Beach, Florida and Staten
Island, New York, which, as of December 31, 1996, passed approximately 237,000
homes and provided service to approximately 165,000 customers. Cox's U.S. cable
television systems are diversified geographically and are not dependent on the
economic viability of any one particular region.
Cox's U.S. cable television systems offer customers packages of basic and
cable programming services consisting of television signals available off-air, a
limited number of television signals from so-called "super stations," numerous
satellite-delivered non-broadcast channels (such as Cable News Network, MTV:
Music Television, USA Network, ESPN, Arts and Entertainment Channel, The
Discovery Channel, The Learning Channel, Turner Network Television and
Nickelodeon), displays of information featuring news, weather, stock and
financial market reports and public, governmental and educational access
channels. In some systems, these satellite-delivered non-broadcast services are
offered at a per channel charge or are packaged together to form a tier of
services offered at a discount from the combined per channel rate. Cox's cable
television systems also provide premium television services to their customers
for an extra monthly charge. Such services (including Home Box Office ("HBO"),
Showtime, Cinemax and regional sports networks) are satellite-delivered channels
that consist principally of feature motion pictures presented without commercial
interruption, sports events, concerts and other entertainment programming.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium television services, which constitute the
principal sources of revenues to Cox.
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OPERATING DATA. The following table indicates the growth of Cox's cable
television systems by summarizing the number of homes passed by cable, basic
customers, premium service units, penetration levels and average monthly revenue
per basic customer as of December 31 for each of the five years set forth below:
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1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Homes passed(a).................. 5,016,749 5,005,858 2,878,857 2,838,197 2,745,491
Basic customers(b)............... 3,259,384 3,248,759 1,851,726 1,784,337 1,722,007
Basic penetration(c)............. 65.0% 64.9% 64.3% 62.9% 62.7%
Premium service units(d)......... 2,000,673 1,827,068 1,203,606 1,205,587 1,249,673
Premium penetration(e)........... 61.4% 56.2% 65.0% 67.6% 72.6%
Average monthly revenues per
basic customer(f)(g)........... $37.40 $34.72 $33.75 $33.65 $31.97
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(a) A home is deemed to be "passed" if it can be connected to the distribution
system without any further extension of the distribution plant.
(b) A home with one or more television sets connected to a cable television
system is counted as one basic service customer.
(c) Basic customers as a percentage of homes passed by cable.
(d) Premium service units include single or multi-channel services offered for a
monthly fee per service.
(e) Premium service units as a percentage of basic customers. A basic service
customer may purchase more than one premium service, each of which is
counted as a separate premium service unit.
(f) Average for each period presented.
(g) Includes revenues associated with competitive access and PrimeStar
operations.
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The following table is a summary of certain operating data as of December 31,
1996 for Cox's U.S. cable television clusters:
<TABLE>
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ACTUAL PRO FORMA(a)
HOMES BASIC BASIC
TOP NINE CLUSTERS: PASSED CUSTOMERS CUSTOMERS
- ------------------ --------- --------- ------------
<S> <C> <C> <C>
Phoenix, AZ..................................... 864,535 450,303 512,965
San Diego, CA................................... 687,531 472,060 472,060
New England..................................... 363,981 258,019 410,355
Hampton, Roads, VA.............................. 410,684 261,226 383,026
New Orleans, LA................................. 427,793 253,741 270,637
Orange County, CA............................... 328,719 248,359 248,359
Omaha, NE....................................... 162,337 98,825 149,352
Pensacola/Ft. Walton Beach, FL (b).............. 193,759 145,218 145,218
Oklahoma City, OK............................... 203,610 116,624 116,624
-------------------- ---------
SUBTOTAL TOP NINE......................... 3,642,949 2,304,375 2,708,596
OTHER SYSTEMS:
- --------------
Santa Barbara/Bakersfield, CA................... 129,613 90,125 90,125
Gainesville/Ocala, FL........................... 116,798 86,606 86,606
Coshocton/Newark, OH............................ 108,898 84,618 84,618
Lubbock/Midland, TX............................. 132,399 76,317 76,317
Middle Georgia.................................. 107,588 72,315 72,315
Cleveland, OH................................... 98,664 70,677 70,677
Roanoke, VA..................................... 77,555 56,773 56,773
Lafayette, IN................................... 49,292 38,124 38,124
Humboldt, CA.................................... 43,231 32,231 32,231
Quad Cities/Cedar Rapids, IA.................... 163,871 111,444 --
Spokane, WA..................................... 132,980 90,600 --
Springfield, IL................................. 71,382 49,139 --
Western Massachusetts........................... 64,475 47,887 --
Saginaw, MI..................................... 54,647 35,916 --
Myrtle Beach, SC................................ 54,551 42,230 --
Washington, PA.................................. 48,253 36,575 --
-------------------- ---------
Subtotal Other Systems..................... 1,454,197 1,021,577 607,786
-------------------- ---------
TOTAL (INCLUDING FT. WALTON BEACH) (b).......... 5,097,146 3,325,952 3,316,382
TOTAL (EXCLUDING FT. WALTON BEACH).............. 5,016,749 3,259,384 3,249,814
- ----------
</TABLE>
(a) The pro forma customer count includes the effects of the TCI and
Continental exchanges completed in January 1997 and the Time Warner
exchange completed in March 1997. The actual customer counts for the TCI,
Continental and Time Warner systems will be lower when conformed to Cox's
methodology of counting customers.
(b) Includes the Ft. Walton Beach, Florida system which is managed as part of
Cox's Pensacola cluster. The system is 50% owned by Cox through a
partnership with Time Warner. This partnership also owns a system in
Staten Island, New York which is managed by Time Warner.
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FRANCHISES. Cable television systems are constructed and operated under non-
exclusive franchises granted by local governmental authorities. These franchises
typically contain many conditions, such as time limitations on commencement and
completion of system construction, service standards including number of
channels, types of programming and the provision of free service to schools and
certain other public institutions, and the maintenance of insurance and
indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as amended by the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act") and the Telecommunications Act of 1996 (the
"1996 Act").
As of March 6, 1997, Cox held 225 franchises. These franchises provide for the
payment of fees to the issuing authority. The 1984 Cable Act prohibits
franchising authorities from imposing annual franchise fees in excess of 5% of
gross revenues and also permits the cable television system operator to seek
renegotiation and modification of franchise requirements if warranted by changed
circumstances. For each of 1996, 1995 and 1994, franchise fee payments made by
Cox averaged approximately 4% of gross revenues.
Cox has never had a franchise revoked. The 1984 Cable Act provides for an
orderly franchise renewal process, and it establishes comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merit and not as part of a comparative process with
competing applications. A franchising authority may not unreasonably withhold
the renewal of a franchise. If a franchise renewal is denied and the system is
acquired by the franchise authority or a third party, then the franchise
authority must pay the operator the "fair market value" for the system covered
by the franchise, but with no value allocated to the franchise itself. Cox
believes that it has satisfactory relationships with its franchising
communities.
PROGRAMMING SUPPLIERS. Cox has various contracts to obtain basic and premium
programming from program suppliers whose compensation is typically based on a
fixed fee per customer or a percentage of Cox's gross receipts for the
particular service. Some program suppliers provide volume discount pricing
structures or offer marketing support to Cox. Cox's programming contracts are
generally for a fixed period of time and are subject to negotiated renewal.
Cox's programming costs have increased in recent years and are expected to
continue to increase due to additional programming being provided to Cox's
customers, increased costs to produce or purchase programming, inflationary
increases and other factors. Increases in the cost of programming services have
been offset in part by additional volume discounts as a result of the growth of
Cox and its success in selling such services to its customers. Cox believes that
it will continue to have access to programming services at reasonable cost
levels.
TELEPHONY AND HIGH-SPEED INTERNET ACCESS BUSINESSES
Cox actively seeks to develop and introduce new services that capitalize on
the capabilities of its advanced broadband platform. Accordingly, business and
residential telephony services and high-speed Internet access are a developing
part of Cox's business strategy. Cox has made commitments to wireline and
wireless telephony and the high-speed Internet access businesses directly and
through its investments in related entities.
WIRELINE. In 1996 Cox began delivering local phone service over its broadband
network in two test markets and commercially offered phone service to residents
of an apartment complex in Orange County, California. In 1997 Cox will launch
local phone service to residential and commercial customers in additional
markets. Additionally, through its wholly-owned subsidiary, Cox Fibernet, Cox
provides access for voice and data services to its customers in three markets
thereby allowing information-intensive businesses alternatives to the local
phone companies for access to an array of telecommunications services. Cox also
owns a 24.6% interest in TCGI. See "--Teleport Communications Group Inc."
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Cox intends to selectively upgrade its broadband network to provide
residential telephone services. The timing and location of Cox's deployment of
residential telephone services will depend on numerous factors, including
regulatory approvals and technical advances. Cox's residential telephony
subsidiaries have either been certified as a competitive local exchange carrier
("CLEC") or have applications pending for CLEC status in eight states. Cox has
executed interconnection agreements with the incumbent LEC in several states,
has arbitrated several agreements and is in the process of negotiating
interconnection agreements in several others. Competition for residential
telecommunications will be driven by competitive pricing, advanced features and
packaging of services.
SPRINT PCS. Sprint PCS engages in the business of providing wireless
communications services, primarily PCS. Sprint PCS is in the process of
building a seamless integrated nationwide wireless communications network.
Sprint PCS, through WirelessCo, L.P., was the successful bidder for 29 broadband
PCS licenses in the auction conducted by the FCC that was completed in March
1995. The markets covered by the licenses for which Sprint PCS was the
successful bidder include New York, San Francisco-Oakland-San Jose, Detroit,
Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and Miami-Fort
Lauderdale. The $2.11 billion total purchase price for the 29 licenses has been
paid to the FCC. Additionally, Cox recently assigned its Omaha MTA license to
Sprint PCS, bringing the total number of licenses to 30. As of February 1997,
Sprint PCS had launched its service in thirteen markets.
Sprint PCS's objectives include the penetration of both the current wireless
and wireline telecommunications marketplaces through the use of advanced digital
technology. Sprint PCS and its affiliates have obtained licenses to offer a full
range of wireless telecommunications services to areas with an aggregate
population of approximately 191 million. Sprint PCS plans to penetrate these
markets by offering a competitively-priced product which will be targeted
towards high usage consumers. Sprint PCS believes that the programmable PCS
network will offer long-term competitive pricing, digital call quality, security
and capacity advantages over the current cellular networks. Sprint PCS intends
to use both mass-marketing and specific customer segment marketing to focus its
efforts on consumers who have significant work or personal telecommunications
demands. Sprint PCS expects to own, or to have affiliation relationships with
PCS providers who own, PCS licenses that together will cover a national scope.
The programmable qualities of the PCS network will allow Sprint PCS to offer
packages that will be competitive with those offered by cellular service
providers and the LECs. These packages may include a flat monthly rate for calls
made from a particular micro-cell site (e.g., the neighborhood of a customer)
and a modest additional charge for calls initiated outside of the customer's
neighborhood. In addition, Sprint PCS intends to cross-market its wireless
services with the telecommunications products and services provided by its
partners.
Sprint PCS also owns equity interests in two partnerships that hold PCS
licenses that were issued under the FCC's pioneer preference program. First,
Sprint PCS purchased from The Washington Post Company a 49% limited partnership
interest in American PCS, L.P. ("APC"). APC holds a broadband PCS license for
the Washington-Baltimore MTA. APC has agreed to affiliate its PCS system with
Sprint PCS's systems and to become part of the partnership's nationwide network,
using the "Sprint Spectrum" trademark. In November 1995, APC began the
commercial deployment of its services with PCS customers accessing the network
in the Washington-Baltimore MTA.
Second, Sprint PCS owns a 49% limited partnership interest in Cox
Communications PCS, L.P. ("PioneerCo"), a partnership formed to hold the license
for the PCS system in the Los Angeles-San Diego MTA, using the license awarded
to Cox under the pioneer preference program. See "-- Cox Communications PCS,
L.P." PioneerCo has also agreed to affiliate its PCS system with the Sprint PCS
nationwide network and use the "Sprint PCS" trademark. In December 1996, Sprint
PCS service was launched in the San Diego area.
COX COMMUNICATIONS PCS, L.P. Cox was awarded a broadband PCS license for the
Los Angeles-San Diego MTA in 1995 under the FCC's pioneer preference program.
The amount payable by Cox for the license is $251.9 million which is included in
outstanding debt at December 31, 1996 and 1995. The Los Angeles-San Diego market
11
<PAGE>
has a total population of over 21 million and includes most of southern
California, southern Nevada and a small portion of Arizona.
In December 1996, Cox, CEI, TCI, Comcast and Sprint formed PioneerCo to
operate the PCS system in the Los Angeles-San Diego MTA. PioneerCo is owned
approximately 49% by Sprint PCS as limited partner and approximately 51% by Cox
Pioneer Partnership ("CPP") as general partner. CPP is a jointly controlled
partnership owned approximately 78% by Cox and approximately 22% by CEI. Cox,
as managing general partner of CPP, controls the license and has day-to-day
management authority over PioneerCo. Upon FCC approval, the PCS license for the
Los Angeles-San Diego MTA and the related payment obligation to the FCC will be
transferred from Cox to PioneerCo. Beginning on the earlier of December 14,
1997 or completion of the FCC's buildout requirement, CPP has the right to put
its interest to Sprint PCS at fair market value over a five-year period. In
addition, CPP has the right to put its entire interest from the fifth through
the eighth anniversaries of the earlier of December 14, 1997 or completion of
buildout, and Sprint PCS has a call on CPP's interest from the fourth to the
eighth anniversaries of the earlier of December 14, 1997 or completion of the
buildout requirement.
PHILLIECO, L.P. AND OMAHA PCS LICENSE. Cox also owns a 17.6% interest in
PhillieCo, a partnership formed by subsidiaries of Cox, TCI and Sprint.
PhillieCo was the successful bidder for a broadband PCS license for the
Philadelphia MTA. The approximately $85 million purchase price for this license
has already been paid to the FCC. PhillieCo will also be affiliated with the
Sprint PCS network and will use the "Sprint PCS" trademark.
Cox was also the successful bidder for a broadband PCS license for the Omaha
MTA in the FCC's 1995 auction. The purchase price for the license was
approximately $5.1 million. In February 1997, following FCC approval, Cox
contributed the Omaha PCS license to Sprint PCS.
TELEPORT COMMUNICATIONS GROUP INC. Prior to June 1996, Cox held a 30.06%
interest in each of TCGI and Teleport Communications Group Partners ("TCGP"),
which both owned and operated fiber optic networks serving several U.S. markets
and provide point-to-point digital communications links to telecommunications
businesses and long-distance carriers. In June 1996, TCGI entered into a
reorganization under which, among other things, TCGI's four stockholders, Cox,
Comcast, Continental and TCI (collectively, the "Cable Stockholders")
contributed to TCGI all of their partnership interests in TCGP, additional
interests in local joint ventures and debt and accrued interest owed by TCGI to
the Cable Stockholders (the "Reorganization"). Following the Reorganization,
TCGI conducted an initial public offering in which it sold 27,025,000 shares
(the "TCGI IPO"). Upon completion of the Reorganization and the TCGI IPO, Cox
owns 39,087,594 shares of TCGI's Class B Common Stock representing 29.8% of
TCGI's Class B Common Stock, 24.6% of total shares outstanding and 29.1% of the
voting power of TCGI. Each share of Class B Common Stock is convertible into
one share of its Class A Common Stock.
@HOME. In August 1996, Cox acquired a 14.2% interest in At Home Corporation.
At Home Corporation is the provider of "@Home," a national Internet "backbone"
service that allows customers access to the Internet at speeds up to hundreds of
times faster than today's telephone modems by using a cable modem and the cable
television broadband network. The other partners are TCI (45.4%), KPCB
Affiliates (13.6%), Comcast (14.2%) and @Home's management (12.6%). At December
31, 1996, @Home had launched its service in four markets.
12
<PAGE>
OTHER TELECOMMUNICATIONS AND TECHNOLOGY INVESTMENTS
A summary of Cox's significant investments in other telecommunications and
technology businesses is set forth below.
<TABLE>
<CAPTION>
COX
PERCENTAGE
OWNERSHIP
INVESTMENT DESCRIPTION INTEREST
- ---------- ----------- -----------
<S> <C> <C>
PrimeStar Partners, L.P. Medium-powered DBS 10.4%
StarSight Telecast, Inc. Interactive program guide 8.6
Syntellect, Inc. Supplier of pay-per-view ordering 8.6
technology
</TABLE>
PRIMESTAR PARTNERS, L.P. PrimeStar is a provider of DBS services. Cox owns a
10.4% interest in PrimeStar. PrimeStar's direct-to-home television delivery
business served, as of December 31, 1996, approximately 1,566,000 customers
(representing an estimated 40% of the U.S. DBS market) using a single satellite
owned and operated by GE Americom. PrimeStar programming includes 94 channels of
popular cable and network television, professional sports and movies, as well as
14 channels of quality audio services. PrimeStar has secured a long-term
agreement with GE Americom for the use of a new satellite which was launched in
January 1997. The new satellite will increase PrimeStar's offering to
approximately 160 channels. PrimeStar was formed in 1990 by GE Americom and nine
of the nation's largest cable television companies, including Cox, TCI, Comcast,
Continental and Time Warner.
The following table sets forth certain financial and subscriber data with
respect to PrimeStar Partners:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
Revenues (millions) ......... $ 413.0 $180.6 $ 27.8
Growth ...................... 129% 550% 155%
Subscribers (thousands)....... 1,565.7 961.2 230.8
Growth ...................... 63% 316% 246%
</TABLE>
STARSIGHT TELECAST, INC. In June 1993, Cox purchased an interest in StarSight
Telecast, Inc. ("StarSight"). StarSight has developed a patented on-screen
interactive television guide and VCR service. The StarSight system allows users
of its service to view up to a week of television programming, select a desired
program by channel, program title or theme, record a program or series of
programs with the touch of a button, reset the order of channels by preference
and delete unwanted channels. In December 1996, StarSight agreed to merge its
operations with Gemstar International Group Limited ("Gemstar"). As a result of
this merger, Cox will receive approximately 1,313,421 shares of Gemstar common
stock representing a 3.5% interest in Gemstar. This transaction is expected to
close in the second quarter of 1997.
As of December 31, 1996, Cox owned 2,166,647 shares of StarSight common stock,
representing approximately 8.6% of the equity of StarSight. As of December 31,
1996, the closing price of StarSight common stock was $9.38 per share.
SYNTELLECT, INC. Cox holds 1,150,000 shares of Syntellect, Inc. ("Syntellect")
common stock, representing approximately 8.6% of the equity of Syntellect.
Syntellect designs and markets ARUs. In March 1996, Syntellect merged with
Telecorp Systems, Inc. ("Telecorp"), which also designs, manufactures and
markets ARUs and a full line of cable-specific voice and data products and
services. Applications include inbound and outbound call processing, pay-per-
view ordering, information management and voice production services. Prior to
the merger of Syntellect and Telecorp, Cox held a 24.54% interest in Telecorp.
13
<PAGE>
CABLE TELEVISION PROGRAMMING INVESTMENTS
Cox has made substantial investments in cable television networks as a means
of generating additional interest among consumers in cable television. A summary
of Cox's significant programming investments is set forth below:
<TABLE>
<CAPTION>
COX PERCENTAGE
OWNERSHIP
INVESTMENT DESCRIPTION INTEREST
- ---------- ----------- --------
<S> <C> <C>
Discovery Communications, Discovery Channel, Learning
Inc. Channel, Animal Planet Network,
retail and other ancillary
businesses 24.6%
E! Entertainment Television Entertainment-related news 10.4
Outdoor Life Network Outdoor activities 41.0
Speedvision Network Automotive, marine and aviation
related 39.0
programming
PPVN Holding Co. Pay-per-view, including Viewer's 20.0
Choice
Digital Cable Radio Digital audio services, 13.6
Associates including Music Choice
Home Shopping Network Home shopping 0.1
The Sunshine Network Inc. Sports, public affairs and 5.3
general entertainment
National Cable Cable television advertising 12.5
Communications sales
Product Information Network Infomercial distribution 45.0
UK Gold BBC and Thames syndicated 37.9
programming (UK)
UK Living Talk shows and soap operas (UK) 49.6
European Channel News and entertainment
Management Limited programming in Europe, 10.0
including BBC Europe and BBC
Prime
GEMS Television Spanish-language service 50.0
targeted at women
</TABLE>
DISCOVERY COMMUNICATIONS, INC. The principal businesses of Discovery
Communications, Inc. ("Discovery") are the advertiser-supported basic cable
networks The Discovery Channel, The Learning Channel, Animal Planet Network and
Discovery Europe and its retail division consisting primarily of 113 stores of
The Nature Company. The Discovery Channel provides nature, science and
technology, history, exploration and adventure programming and is distributed to
customers in virtually all U.S. cable homes. The Learning Channel broadcasts a
variety of educational and non-fiction programming. In addition, through
internally generated funding, significant investments are being made by
Discovery in building a documentary programming library. The Learning Channel
has increased distribution from fewer than 14 million cable homes prior to its
acquisition by Discovery in 1991 to over 53 million homes as of December 31,
1996. Cox holds a 24.6% interest in Discovery, with TCI, NewChannels Corp.
("NewChannels") and Discovery's management holding interests of 49.3%, 24.6% and
1.4%, respectively. In addition, in March 1995 Discovery announced the creation
of a new division to produce movies for theatrical release under the name
Discovery Pictures.
Cox believes that the documentary profile of Discovery programming makes it
one of the best-positioned U.S. cable networks to expand internationally.
Discovery is expanding the "Discovery" brand name by establishing channels based
in Europe, Latin America and Asia, a substantial portion of the programming for
which will be drawn from Discovery's own documentary programming library.
14
<PAGE>
The following table sets forth certain financial and subscriber data relating
to Discovery, The Discovery Channel and The Learning Channel:
DECEMBER 31
-------------------------
DISCOVERY 1996 1995 1994
------- ------- -------
Revenues (millions of dollars).. $661.8 $447.2 $329.6
Growth.......................... 47.8% 35.7% 40.6%
THE DISCOVERY CHANNEL
Subscribers (millions)........ 70.6 66.5 61.5
Growth........................ 6.2% 8.1% --
Nielsen Rating - Avg.......... 0.61 0.63 0.53
THE LEARNING CHANNEL
Subscribers (millions)........ 53.9 43.2 31.5
Growth........................ 24.8% 37.1% 15.3%
Nielsen Rating - Avg.......... 0.38 0.35 0.31
E! ENTERTAINMENT TELEVISION. E! Entertainment Television, Inc. is an
entertainment-related news service with distribution to approximately 42 million
customers as of the end of 1996. E! Entertainment seeks to build value based on
international interest in Hollywood and entertainment industry news, information
and features. Cox owns 10.4% of E! Entertainment Television. Its partners are
Comcast, Continental and TCI, each with a 10.4% interest, and Time Warner with a
58.4% interest. In January 1997, Comcast and The Walt Disney Company agreed to
form a partnership to which Comcast will contribute its 10.4% interest and which
will then acquire Time Warner's 58.4% interest. Cox's interest in E!
Entertainment will not be affected by this transaction.
The following table sets forth certain financial and subscriber data with
respect to E! Entertainment:
DECEMBER 31
----------------------
1996 1995 1994
------ ------ ------
Revenues (millions of dollars).. $97.5 $74.3 $49.1
Growth.......................... 31.2% 51.3% 54.9%
Subscribers (millions).......... 41.9 31.2 26.8
Growth.......................... 34.3% 16.4% 12.6%
OUTDOOR LIFE NETWORK AND SPEEDVISION NETWORK. The Outdoor Life Network, which
was launched on July 31, 1995, presents programming consisting primarily of
outdoor life and participants themes. The Speedvision Network, which was
launched in January 1996, presents a variety of programming of interest to
automobile, boat and airplane enthusiasts including news, historical and other
information and event coverage. Cox owns approximately 41% and 39% of Outdoor
Life and Speedvision, respectively. The other partners include Comcast,
Continental and Times Mirror.
PPVN HOLDING CO. PPVN Holding Co. ("PPVN"), which operates under the brand-
name Viewer's Choice, is a cable operator-controlled buying cooperative for pay-
per-view programming. Cox holds a 20% interest in PPVN, with the remaining
equity interests held by Time Warner (30%), TCI (10%), Comcast (10%),
Continental (10%), Viacom International Inc. (10%) and Walt Disney Pictures and
Television (10%).
DIGITAL CABLE RADIO ASSOCIATES. Digital Cable Radio Associates distributes
audio programming, under the brand name Music Choice, in a digital format via
coaxial cable to more than one million customers in the United States. This
service allows cable television customers to receive compact disc quality sound
in diverse music formats. Cox currently holds a 13.6% interest, with the
remaining interests held in varying proportions by Jerrold Communications, Sony
Music Entertainment, Inc., Continental, Comcast, Time Warner, Adelphia
Communications and EMI Music.
15
<PAGE>
NATIONAL CABLE COMMUNICATIONS, L.P. Cox has a 12.5% limited partnership
interest in NCC, a partnership which represents cable television companies to
advertisers. NCC is the largest representation firm in spot cable advertising
sales. It enables advertisers to place advertising in selected multiple systems
on a regional or national single-source basis, and enhances the ability of
affiliated cable television systems to attract advertisers other than purely
local advertisers. The other limited partners in NCC are Continental, Time
Warner and Comcast, each with a 12.5% interest. Katz Cable Corporation is the
sole general partner and has a 50% interest.
THE PRODUCT INFORMATION NETWORK. Cox and Jones International Ltd. formed a
joint venture known as the Product Information Network ("PIN"). PIN was
organized to develop a network for the distribution of multiple direct response
television commercials, or "infomercials," through cable television systems and
other television programming outlets. In January 1996, Adelphia Communications
purchased an interest in PIN, reducing Cox's interest to 45%.
UK GOLD. Cox holds a 38% interest in UK Gold Television Limited ("UK Gold"),
which operates a basic cable programming service in the U.K. UK Gold broadcasts
entertainment programming from the libraries of the BBC and Thames, and
currently has access to over 130,000 hours (14.8 years) of unsyndicated
programming for exhibition in the U.K. on an exclusive basis. As of December 31,
1996, UK Gold had over 5,000,000 customers. UK Gold also is included in the
package of services distributed by British Sky Broadcasting ("BSkyB") to
satellite customers in the U.K., and therefore UK Gold has subscriber fee
revenues from both satellite and cable television customers. UK Gold was
launched by Cox in November 1992 in partnership with BBC, Thames and TCI, which
own interests of 20%, 15% and 27%, respectively.
UK LIVING. In July 1993, Cox invested in UK Living, a new basic cable
programming service that was launched in the United Kingdom in September 1993.
UK Living programming, patterned after Lifetime in the United States, is
targeted at women, with daytime programming consisting of informational shows of
interest to homemakers, original talk shows produced by Thames and rebroadcasts
of popular BBC talk shows. Nighttime programming consists of movies, dramatic
series and game shows. UK Living is also included in the BSkyB package of
services distributed to satellite customers in the U.K. UK Living has subscriber
fee revenues from both satellite and cable television customers, and seeks to
minimize its administrative and support services (including advertising sales)
expenses through a collaborative effort with UK Gold pursuant to a service
contract. UK Living is owned 49.6% by Cox, 35.4% by TCI and 15% by Thames.
In March 1997, Cox entered into an agreement to exchange its interests in UK
Gold and UK Living for an equity stake in Flextech plc, a publicly traded cable
programming company in the U.K. Cox will receive 20,701,084 shares of Flextech,
representing approximately a 12.6% interest. This transaction is expected to
close during the second quarter of 1997.
EUROPEAN CHANNEL MANAGEMENT LIMITED. In January 1995, Cox invested in a new
international programming joint venture in Europe. Cox is a 10% partner in
European Channel Management Limited which delivers BBC World, a 24-hour news
channel, and BBC Prime, an entertainment channel, to European subscribers
outside the United Kingdom. Both channels will seek to serve growing European
demand for programming by accessing the programming expertise and recognition of
the BBC. Strategically, this investment provides another avenue for Cox to
position itself in the international programming arena in association with a
well-known programming brand. The ventures' other partners are the BBC (40%) and
Pearson plc (50%).
GEMS TELEVISION. In June 1994, Cox entered into an equal partnership with
International Television, Inc. ("ITI"), a subsidiary of Empresas 1-BC,
Venezuela's largest media company. Prior to the formation of the partnership,
ITI had licensed and broadcast Spanish-language television programming under the
name of GEMS Television. The Cox-ITI partnership will continue the existing
business of GEMS Television and expand into additional markets in the United
States, South America and other Spanish or Portuguese-speaking regions. The
16
<PAGE>
programming of GEMS Television is produced in Venezuela, consists largely of
telenovelas (soap operas) and is targeted primarily to women in Latin America
and to Spanish-speaking women in the United States. The Cox-ITI partnership has
access to more than 10,000 hours of Spanish-language programming for use in the
business of GEMS Television.
UNITED KINGDOM BROADBAND NETWORKS
TELEWEST COMMUNICATIONS PLC. At December 31, 1996, Cox had a 14.7% ownership
interest in TeleWest Communications plc ("TeleWest"), a company that is
currently operating and constructing cable television and telephony systems in
the United Kingdom. Other significant shareholders of TeleWest are US West Inc.,
TCI and SBC Communications, Inc.
TeleWest is the largest cable television and telephony operator in the U.K.
based on the number of homes passed and subscribers. The following table sets
out certain data concerning TeleWest's owned and operated and affiliated
franchises:
DECEMBER 31
CABLE TELEVISION 1996 1995
----------- ---------
Homes passed and marketed.... 2,626,835 2,066,654
Basic subscribers............ 599,599 457,472
RESIDENTIAL TELEPHONY
Homes passed and marketed.... 2,543,041 1,882,559
Residential subscribers...... 686,101 477,655
Residential lines connected.. 693,521 479,465
BUSINESS TELEPHONY
Business subscribers......... 23,297 15,986
Business lines connected..... 78,569 47,518
COMPETITION
CABLE TELEVISION COMPETITION
The cable television systems owned by Cox compete with other communications
and entertainment media, including conventional off-air television broadcasting
service, newspapers, movie theaters, live sporting events and home video
products. Cable television service was first offered as a means of improving
television reception in markets where terrain factors or remoteness from major
cities limited the availability of off-air television. In some of the areas
served by Cox's systems, a substantial variety of television programming can be
received off-air. The extent to which cable television service is competitive
depends upon the cable television system's ability to provide a greater variety
of programming than is available off-air.
Since Cox's U.S. cable television systems operate under non-exclusive
franchises, other companies may obtain permission to build cable television
systems in areas where Cox operates. To date, the extent of actual overbuilding
in these areas has been relatively slight, and fewer than 2% of Cox's total
homes passed are overbuilt at this time. While Cox believes that the current
level of overbuilding has not had a material impact on its operations, it is
unable to predict the extent to which adverse effects may occur in the future as
a result of overbuilds.
Additional competition may come from private satellite master antenna
television ("SMATV") systems which transmit signals by satellite to receiving
facilities located on customers' premises such as condominiums, apartment
complexes and other private residential developments. The 1996 Act broadens the
17
<PAGE>
definition of SMATV systems not subject to regulation as a franchised cable
communications service. The operators of these private systems often enter into
exclusive agreements with apartment building owners or homeowners' associations
that may preclude operators of franchised cable television systems from serving
residents of such private complexes. A private cable television system normally
is free of the regulatory burdens imposed on franchised cable television
systems. Cox is unable to predict the extent to which additional competition
from these services will materialize in the future or the impact such
competition would have on Cox's operations.
The availability of reasonably-priced home satellite dish earth stations
("HSDs") enables individual households to receive many of the satellite-
delivered program services formerly available only to cable subscribers.
Furthermore, the 1992 Cable Act contains provisions, which the FCC has
implemented with regulations, to enhance the ability of cable competitors to
purchase and make available to HSD owners certain satellite-delivered cable
programming at competitive costs. The 1996 Act and FCC regulations implementing
that law preempt certain local restrictions on the use of HSDs and roof-top
antennae to receive satellite programming and over-the-air broadcasting
services.
In recent years, the FCC has initiated new policies and authorized new
technologies to provide a more favorable operating environment for new and
existing technologies that provide, or have the potential to provide,
substantial additional competition to cable television systems. These
technologies include, among others, DBS and MMDS (as defined below) services.
High-powered direct-to-home satellites have made possible the wide-scale
delivery of programming to individuals throughout the United States using roof-
top or wall-mounted antennas. Companies offering DBS services are using video
compression technology to increase satellite channel capacity and to provide a
package of movies, network programming and other program services competitive to
those of cable television systems.
Programming is currently available to the owners of HSDs through conventional,
medium and high-powered satellites. PrimeStar, a consortium comprised of cable
operators including Cox and a satellite company, commenced operation in 1990 of
a medium-power DBS satellite system using the Ku portion of the frequency
spectrum and currently provides service consisting of approximately 95 channels
of programming, including broadcast signals and pay-per-view services. See "--
Other Telecommunications and Technology Investments -- PrimeStar Partners L.P."
In January 1997, PrimeStar launched a replacement medium-power DBS satellite
which will enable it to increase its capacity to approximately 160 channels.
DirecTV, which includes AT&T Corp. as an investor, began offering nationwide
high-power DBS service in 1994 accompanied by extensive marketing efforts, along
with United States Satellite Broadcasting Company which uses capacity on
DirecTV's satellite. Together, both companies offer over 200 channels of
service using video compression technology. Several other major companies,
including EchoStar Communications Corporation ("EchoStar") and American Sky
Broadcasting ("ASkyB"), a joint venture between MCI Telecommunications
Corporation and News Corp., have begun offering or are currently developing high
power DBS services. ASkyB is constructing satellites that reportedly, when
operational, will provide domestically approximately 200 channels of DBS
service.
The ability of DBS service providers to compete with the cable television
industry will depend on, among other factors, the availability of reception
equipment at reasonable prices. Although it is not possible at this time to
predict the likelihood of success of any DBS services venture, DBS may offer
substantial competition to cable television operators.
Recently, EchoStar and ASkyB announced their intention to merge operations,
subject to obtaining necessary federal regulatory approvals. If the merger is
approved, the combined company could provide 50 channels of programing reaching
the continental United States, and over 50 additional channels covering various
areas of the country. This channel capacity could be increased through the use
of channel compression technology. It has been reported that by using such
increased channel capacity and video compression technology, the combined
company could provide 500 channels of programming which would include the
signals of selected television stations that could be received by DBS
subscribers in local viewing areas. Currently, satellite program providers are
18
<PAGE>
only authorized to provide the signals of television network stations to
subscribers who live in areas where over-the-air reception of such signals
cannot be received. The offering of local broadcast signals in DBS program
packages would provide substantial competition to the cable industry. However,
implementation of this proposal would likely require the amendment of copyright
laws which currently preclude the retransmission of local signals by satellite
carriers outside of their viewing areas.
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service ("MMDS"),
commonly called wireless cable, which are licensed to serve specific areas using
low-power microwave frequencies to transmit video programming over-the-air to
subscribers. There are MMDS operators who are authorized to provide or are
providing broadcast and satellite programming to subscribers in areas served by
Cox's cable systems. Several Regional Bell Operating Companies ("BOCs") have
acquired significant interests in major MMDS companies operating in certain of
Cox's cable service areas. Recent public announcements and activities by
BellSouth, a BOC operating in the Southeast, indicate plans for that BOC to
compete with Cox through the use of MMDS technology in the New Orleans market.
Pacific Telesis Enterprises, a BOC operating in California, also is providing or
authorized to provide wireless cable services in several California communities
which Cox serves. Additionally, the FCC recently adopted new regulations
allocating frequencies in the 28 GHz band for a new multichannel wireless video
service similar to MMDS but has imposed cross-ownership restrictions of these
frequencies by cable operators and telephone companies. For a three-year
period, cable operators and telephone companies will be precluded from operating
on these frequencies in the same authorized or franchised service areas in which
they provide service. Cox is unable to predict whether wireless video services
will have a material impact on its operations.
The 1996 Act repeals the cable/television cross-ownership ban adopted in the
1984 Cable Act, and contains restrictions on buying out incumbent cable
operators in a telephone company's service area, especially in suburban and
rural markets. The 1996 Act will enable common carriers to provide video
programming services as either cable operators or open video system ("OVS")
operators, a regulatory regime to be established by the FCC in a rulemaking
proceeding.
Other new technologies may become competitive with respect to certain non-
entertainment services that cable television systems can also offer. The FCC has
authorized television broadcast stations to transmit textual and graphic
information useful both to consumers and to businesses. The FCC also permits
commercial and non-commercial FM stations to use their subcarrier frequencies to
provide non-broadcast services, including data transmissions. The FCC
established an over-the-air Interactive Video and Data Service that will permit
two-way interaction with commercial and educational programming along with
informational and data services. Telephone companies and other common carriers
also provide facilities for the transmission and distribution of data and other
non-video services.
TELEPHONY COMPETITION
LANDLINE TELECOMMUNICATIONS SERVICES. While the current switched voice and
data telecommunications market is dominated by local telephone companies, also
known as incumbent LECs, the 1996 Act presents new opportunities for new
entrants into these markets. Incumbent LECs provide a wide range of local
telecommunications services and equipment to customers, as well as originating
and terminating access to their local networks to interexchange carriers and
mobile radio service providers. Because LECs historically have had exclusive
state franchises by law to provide telephone service, they have established
long-term, exclusive relationships with their customers. Under the new law, and
subject to certain limitations for rural LECs, the FCC is directed to preempt
any state law or regulation that acts to prevent new competitive entry into
incumbent LEC markets.
The 1996 Act represents the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934. The 1996 Act is
intended to open local exchange markets to competition, which should result in a
substantial increase in Cox's business opportunities to deliver telephony over
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its broadband networks. Among its more significant provisions, the
Telecommunications Act: (i) removes legal barriers to entry in local telephone
markets; (ii) requires incumbent LECs to "interconnect" with competitors,
including the provision of necessary elements for local competition such as
telephone number portability; (iii) establishes procedures for incumbent LEC
entry into new markets such as long distance and cable television; (iv) relaxes
regulation of telecommunications services provided by incumbent LECs and all
other telecommunications service providers; and (v) directs the FCC to establish
a subsidy mechanism for the preservation of universally affordable telephone
service.
Under the 1996 Act, new landline entrants will become subject to additional
federal regulatory requirements when they provide local exchange service in any
market. The 1996 Act imposes a number of access and interconnection requirements
on all LECs, with additional requirements imposed on incumbent LECs.
Specifically, the 1996 Act required the FCC to implement rules under which all
LECs must provide telephone number portability, dialing parity, reciprocal
compensation for traffic transport and termination, the purchase of unbundled
network elements, resale and access to rights of way. The 1996 Act also requires
state commissions to review and approve voluntarily negotiated interconnection
agreements and to arbitrate compulsory interconnection negotiations between new
entrants and incumbent LECs. These requirements also place burdens on new
entrants that may benefit other competitors. In particular, the resale
requirement means that a company could seek to resell the facilities of a new
entrant without making a similar investment in facilities.
The 1996 Act eliminates the requirement that incumbent LECs obtain FCC
authorization prior to constructing facilities for interstate services. The 1996
Act also limits the FCC's ability to review incumbent LEC tariff filings. These
changes will increase the speed with which the LECs are able to introduce new
service offerings and new pricing of existing services, thereby increasing their
flexibility to respond to new entrants.
In addition to incumbent LECs and existing competitive access providers, new
entrants potentially capable of offering switched and non-switched services
include individual cable television companies, electric utilities, long-distance
carriers, microwave carriers, wireless service providers, resellers and private
networks built by large end-users.
The FCC has adopted many, but not all, of the rules required to implement the
1996 Act. On August 1, 1996 the FCC adopted a report and order promulgating
rules and regulations to implement the 1996 Act's provision that obligates CLECs
and incumbent LECs to interconnect their networks and to develop a methodology
to translate the 1996 Act's pricing guidelines into incumbent LEC pricing of
interconnection for reciprocal transport and termination, unbundled elements and
resale (the "Local Competition Order"). The Local Competition Order adopts a
national pro-competitive framework for interconnection but leaves to the
individual state commissions the task of implementing the FCC's rules in their
process of reviewing interconnection agreements. The states are to base rates
for interconnection, the reciprocal exchange of local telephone traffic and the
purchase of ILEC unbundled network elements on a new incremental cost
methodology called Total Element Long-Run Incremental Cost ("TELRIC").
Incumbent LECs may present the states with TELRIC cost studies, while the FCC
adopted interim "default" rates the states could apply pending state review of
TELRIC studies. Additionally, the FCC interpreted the non-discrimination
provisions of the 1996 Act to allow carriers to request that the incumbent LEC
make available to them any interconnection, service or network element contained
in an approved agreement to which the LEC was a party under the same terms and
conditions.
Many petitions for reconsideration of the FCC's Local Competition Order are
pending at the FCC. Despite the adoption of generally pro-competitive rules
that Cox views as consistent with the requirements of the 1996 Act, the
interconnection rules, particularly those containing the TELRIC pricing
methodology and "default" rates, have not taken effect due to successful motions
for stay filed by incumbent LECs and jurisdictional challenges filed by several
state utility commissions. Review of the FCC's rules is before the Eighth
Circuit Court of Appeals, which in October 1996 granted a temporary stay of many
of the interconnection rules pending court review of the merits of the
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petitioner's challenge. The Eighth Circuit heard oral arguments of the case on
January 17, 1997 and a decision is expected within several months. In the
meantime, the stay only affects certain FCC rules; the independent legal
obligations created by the 1996 Act have not been stayed. As a result, many
states are applying the FCC's interpretations of the 1996 Act as guidelines,
despite the fact that many FCC interconnection rules are not in effect.
The FCC has announced that the Local Competition Order is the first part in a
"trilogy" of orders that will reform access pricing and universal service
consistent with the 1996 Act's goal of encouraging competition. It is
anticipated that the prices incumbent LECs charge for both intrastate and
interstate access services will be substantially reduced as a result of the
FCC's initiative to reform the current access charge regime as well as by reform
of current universal service procedures.
In July 1996 the FCC released an Order promulgating rules implementing the
1996 Act's directive for local telephone number portability (the "Number
Portability Order"). The FCC ordered all LECs to begin phased development of a
long-term service provider portability method in the 100 largest Metropolitan
Statistical Areas ("MSAs") no later than October 1, 1997, and to complete
deployment in those MSAs by March 31, 1998. After March 31, 1998, each LEC must
make number portability available within six months after receiving a specific
request by another telecommunications carrier in areas outside the 100 largest
area MSAs. Until long-term service provider number portability is available,
all LECs must provide currently available number portability measures as soon as
reasonably possible after a specific request from another carrier. Because new
carriers are at a competitive disadvantage without telephone number portability,
the Number Portability Order should enhance Cox's ability to offer service in
competition with the incumbent LECs. It is uncertain how effective these
regulations will be in promoting cost effective and efficient number
portability. The Number Portability Order does not address how the costs of
implementing long-term service provider number portability will be recovered.
This issue is subject to an additional comment period and is not expected to be
decided until later in 1997. The Number Portability Order also is subject to
Petitions for Reconsideration at the FCC and Petitions for Review filed before
the Eighth Circuit Court of Appeals.
A Federal-State Joint Board mandated by the 1996 Act made initial
recommendations regarding universal service in the fall of 1996. The Joint
Board proposed a new regime for funding universal telephone service and for
distributing universal service subsidies. The recommended decision is subject
to public comment and may be changed between now and May 8, 1997, when the FCC
is required to adopt a final order on universal service. If the recommended
decision is adopted, there will be specific subsidies for high cost areas and
carriers, for low income consumers and for advanced services for schools and
libraries. The total amount of these subsidies is expected to range from $5 to
$14 billion annually. Under the proposal adopted by the Joint Board, any
telecommunications carrier that provided all of the services that fall within
the definition of "universal service" would be eligible to receive subsidies, as
would any entity that provided advanced services or infrastructure used by
schools and libraries. Funding for these subsidies would come from surcharges
imposed on all telecommunications carriers, but the exact formula for the
subsidies has not been determined. In addition to the federal universal service
plan, it is likely that most or all states will adopt their own universal
service support mechanisms. Another issue to be resolved is the application of
a "cost proxy" model that identifies those carriers in need of subsidies to
maintain universal service.
While not directly required under the 1996 Act, the FCC has also adopted a
Notice of Proposed Rulemaking to reform interstate access charges that are
generally acknowledged to contain subsidy elements. The Notice suggests as
alternatives market-based and proscriptive reforms to interstate access charges.
Many parties have commented on these alternatives and the FCC is considering
concluding at least the first stage of access charge reform at the same time it
adopts universal service reform. The wide-ranging Notice also tentatively
concludes that interstate access charges should not be imposed on enhanced
services traffic such as Internet access traffic.
WIRELESS TELECOMMUNICATIONS SERVICES. The success of Sprint PCS will depend
on its ability to compete with other wireless communications providers (and
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wired communications providers) operating within its markets. It is anticipated
that the telecommunications industry will become increasingly competitive as new
service providers enter the wireless telecommunications marketplace.
The wireless telephone industry provides a wide range of high-quality, high
capacity communications services to vehicle-mounted and hand-held portable
telephones and other two-way radio devices. Today, the industry comprises many
competing service providers, the most prominent of which are the existing
cellular radio-telephone service operators.
CELLULAR. The U.S. cellular telephone business has been characterized as a
regulated duopoly. The FCC has allocated only two licenses for cellular service
in each cellular service area. One of the two licenses was initially available
only to a company or group affiliated with the local landline telephone carriers
in the market (the "wireline" license), and the other license was initially
awarded to a company not affiliated with any landline telephone carrier (the
"non-wireline" license).
Cellular service providers operating in the PCS markets of Sprint PCS have
already established a substantial customer base. They collectively constitute
the primary initial competitors to the PCS networks of Sprint PCS. Although PCS
promises to offer service capabilities comparable or technically superior to
cellular service at lower cost, the cellular industry continues to enjoy the
benefits of being the incumbent provider of wireless service. Cellular operators
already have in place equipment supplier arrangements and have acquired the
sites necessary to provide service to a substantial portion of their geographic
service areas.
OTHER PCS PROVIDERS. Sprint PCS will face direct competition for PCS
subscribers from other licensed PCS systems within its markets. There are
potentially six PCS providers (not counting resellers and marketing agents for
licensees) in each PCS service area. Three licensees will hold 30 MHz of PCS
spectrum, one of which is licensed for a basic trading area, and the remaining
three licensees will hold 10 MHz of PCS spectrum. Some of the 10 MHz licenses
will be used to provide niche services or will be purchased by existing cellular
providers for added spectrum, while the 30 MHz licenses will be used to offer a
broad range of voice, data and related communications services, and may
ultimately develop into services that include a wireless local loop
functionality.
Sprint PCS may also face competition from other current or developing
technologies. Specialized Mobile Radio ("SMR") systems, such as those used by
taxicabs, as well as other forms of mobile communications service, may provide
competition in certain markets. SMR systems are permitted by the FCC to be
interconnected to the public switched telephone network and are significantly
less expensive to build and operate than cellular telephone systems. SMR
systems, however, are licensed to operate on substantially fewer channels than
PCS systems and generally lack PCS's ability to expand capacity through
frequency reuse by using many low-power transmitters and micro-cells to hand off
calls.
A company holding a considerable number of SMR licenses across the nation is
implementing its digital system to use available SMR spectrum in various
metropolitan areas more efficiently to increase capacity and to provide a range
of mobile radio communications services. The implementation of this proposal,
known as Enhanced Specialized Mobile Radio ("ESMR") service, has resulted in
legislation and FCC rules that regulate ESMR services in a manner that reflects
its potential interchangeability with cellular and PCS services. In 1994, the
FCC decided to license SMR systems in the 800 Mhz bands for wide-area use, thus
increasing potential competition with cellular and PCS. It also recently
decided to license SMR spectrum in contiguous spectrum blocks via the
competitive bidding process. Although wide-area SMR spectrum has not yet been
assigned, the licensing change may further the potential of SMR services to
compete with cellular and PCS.
OTHER. Paging or beeper services that feature voice message, data services
and tones are also available in the targeted markets of Sprint PCS. Advanced
two-way paging systems with nationwide coverage are also under development.
These services may provide adequate capacity and sufficient mobile capabilities
to satisfy the needs of some potential PCS subscribers.
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Several applicants have received and several others are seeking FCC
authorization to construct and operate global satellite networks to provide
domestic and international mobile communications services from geostationary and
low earth orbit satellites. In addition, the Omnibus Budget Reconciliation Act
of 1993 (the "1993 Budget Act") provided, among other things, for the release of
200 MHz of Federal government spectrum for commercial and/or other non-federal
use over a 15 year period. The 1993 Budget Act also authorized the FCC to
conduct competitive bidding for certain radio spectrum licenses and required the
FCC to adopt new rules that eliminate the regulatory distinctions between mobile
common and private carriers who interconnect with the public switched network
and make their services available to a substantial portion of the public for
profit. These developments and further technological advances may make available
other alternatives to PCS service thereby creating additional sources of
competition. An example of this is the FCC's recent order creating a new
flexible Wireless Communications Service, which could potentially compete with
wireless and wired networks for customers.
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state governments
and substantially all local governments. In addition, various legislative and
regulatory proposals under consideration from time to time by the Congress and
various federal agencies may materially affect the cable television industry.
The following is a summary of federal laws and regulations affecting the growth
and operation of the cable television industry and a description of certain
state and local laws.
CABLE COMMUNICATIONS POLICY ACT OF 1984. The 1984 Cable Act generally became
effective in December 1984. This federal statute, which amended the
Communications Act of 1934 established comprehensive national standards and
guidelines for the regulation of cable television systems and identified the
boundaries of permissible federal, state and local government regulation. The
FCC, in turn, was charged with responsibility for adopting rules to implement
the 1984 Cable Act. Among other things, the 1984 Cable Act affirmed the right of
franchising authorities (state or local, depending on the practice in individual
states) to award one or more franchises within their jurisdictions. It also
prohibited non-grandfathered cable television systems from operating without a
franchise in such jurisdictions. In connection with new franchises, the 1984
Cable Act provides that in granting or renewing franchises, franchising
authorities may establish requirements for cable-related facilities and
equipment, but may not establish or enforce requirements for video programming
or information services other than in broad categories.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992. In October
1992, Congress enacted the 1992 Cable Act. This legislation, which amended the
1984 Cable Act, made significant changes to the legislative and regulatory
environment for the cable industry. The 1992 Cable Act became effective in
December 1992, although certain provisions, most notably those dealing with rate
regulation and retransmission consent, took effect at later dates. The 1992
Cable Act permitted a greater degree of regulation of the cable industry with
respect to, among other things: (i) cable system rates for both basic and
certain cable programming services; (ii) programming access and exclusivity
arrangements; (iii) access to cable channels by unaffiliated programming
services; (iv) leased access terms and conditions; (v) horizontal and vertical
ownership of cable systems; (vi) customer service requirements; (vii) franchise
renewals; (viii) television broadcast signal carriage and retransmission
consent; (ix) technical standards; (x) customer privacy; (xi) consumer
protection issues; (xii) cable equipment compatibility; (xiii) obscene or
indecent programming; and (xiv) subscription to tiers of service other than
basic service as a condition of purchasing premium services. Additionally, the
legislation encouraged competition with existing cable television systems by
allowing municipalities to own and operate their own cable television systems
without a franchise, preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional franchises covering an
existing cable system's service area, and prohibiting the common ownership of
cable systems and co-located MMDS or SMATV systems. The 1992 Cable Act also
precluded video programmers affiliated with cable television companies from
favoring cable operators over competitors and required such programmers to sell
their programming to other multichannel video distributors. The legislation
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required the FCC to initiate a number of rulemaking proceedings to implement
various provisions of the statute, the majority of which, including certain
proceedings related to rate regulation, have been completed.
Various cable operators have filed actions in the United States District Court
in the District of Columbia (the "D.C. District Court") challenging the
constitutionality of several sections of the 1992 Cable Act. In April 1993, a
three-judge panel of the D.C. District Court granted summary judgment for the
government and upheld the constitutional validity of the must-carry provisions
of the 1992 Cable Act. That decision was appealed directly to the United States
Supreme Court, which vacated the decision in June 1994 and remanded it to the
three-judge panel for further proceedings. On December 12, 1995, the three-judge
panel again upheld the must-carry rules' constitutional validity. Pending the
Supreme Court's final review of the constitutionality of the must-carry rules,
such rules continue in force. On August 30, 1996, the U.S. Court of Appeals for
the D.C. Circuit upheld the constitutionality of nine other provisions of the
1992 Cable Act. Also on June 6, 1995, the same court of Appeals generally
upheld the FCC's rate regulations which were implemented pursuant to the 1992
Cable Act.
THE TELECOMMUNICATIONS ACT OF 1996. On February 1, 1996, Congress passed the
1996 Act, which was signed into law by the President on February 8, 1996. The
1996 Act substantially revises the Communications Act of 1934, as amended (the
"Communications Act"), including the 1984 Cable Act and the 1992 Cable Act under
which the cable industry is regulated. The FCC has been conducting various
rulemaking proceedings to implement the provisions of the 1996 Act over the last
year.
The 1996 Act has been described as one of the most significant changes in
communications regulation since the passage of the Communications Act. The 1996
Act modifies various rate regulation provisions of the Cable Act of 1992.
Generally, under the 1996 Act, cable programming service ("CPS") tier rates are
deregulated on March 31, 1999. Upon enactment, the CPS rates charged by small
cable operators are deregulated in systems serving 50,000 or fewer subscribers.
The 1996 Act also revises the CPS complaint filing procedures and adds a new
effective competition test under which cable rates may be deregulated. The 1996
Act allows cable operators to aggregate equipment costs into broad categories,
such as converter boxes, regardless of the varying levels of functionality of
the equipment within each such broad category, on a franchise, system, regional,
or company level. The statutory changes also facilitate the rationalizing of
equipment rates across jurisdictional boundaries. These favorable cost-
aggregation rules do not apply to the limited equipment used by basic service-
only subscribers.
The 1996 Act is intended, in part, to promote substantial competition in the
marketplace for telephone local exchange service and in the delivery of video
and other services and permits cable television operators to enter the local
telephone exchange market. Cox's ability to competitively offer telephone
services may be adversely affected by the degree and form of regulatory
flexibility afforded to LECs, and in part, will depend upon the final outcome of
various FCC rulemakings, including the proceeding which will deal with the
interconnection obligations of telecommunications carriers. The 1996 Act also
repeals the cable television/telephone cross-ownership ban adopted in the 1984
Cable Act and permits local telephone companies (also known as LECs) and other
service providers to provide video programming.
The most far-reaching changes in communications businesses will result from
the telephony provisions of the 1996 Act. These provisions promote local
exchange competition as a national policy by eliminating legal barriers to
competition in the local telephone business and setting standards to govern the
relationships among telecommunications providers, establishing uniform
requirements and standards for entry, competitive carrier interconnection and
unbundling of LEC monopoly services. The statute expressly preempts any legal
barriers to competition under state and local laws. Many of these barriers have
been lifted by state actions over the last few years, but the 1996 Act completes
the task. The 1996 Act also establishes new requirements to maintain and enhance
universal telephone service and new obligations for telecommunications providers
to maintain the privacy of customer information.
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Under the 1996 Act, LECs may provide video service as cable operators or
through "open video systems" ("OVSs"), a regulatory regime that gives them more
flexibility than traditional cable systems. The 1996 Act eliminates the
requirement that telephone companies file Section 214 applications with the FCC
before providing video service. This will limit the ability of cable operators
to challenge the econcomic viability of telephone company entry into the video
market. With certain exceptions, the 1996 Act also restricts buying out
incumbent cable operators in the LECs service area.
Other parts of the 1996 Act also will affect cable operators. The 1996 Act
directs the FCC to revise the current pole attachment rate formula. This will
result in an increase in the rates paid by entities, including cable operators,
that provide telecommunication services. (Cable operators that provide only
cable services are unaffected.) Under the V-chip provisions of the 1996 Act,
cable operators and other video providers are required to carry any program
rating information that programmers include in video signals. Cable operators
also are subject to new scrambling requirements for sexually explicit
programming. These requirements have been held constitutional by a three-judge
federal district court, and the United States Supreme Court has been requested
to review the decision. In addition, cable operators that provide Internet
access or other online services are subject to the new indecency limitations.
Two U.S. District Courts have issued final rulings striking down the Internet
access provisions and the U.S. Supreme Court has agreed to hear the appeals of
these rulings. The courts have preliminarily enjoined the enforcement of these
content-based provisions relating to scrambling and Internet access.
Under the 1996 Act, a franchising authority may not require a cable operator
to provide telecommunications services or facilities, other than an
institutional network, as a condition to a grant, renewal, or transfer of a
cable franchise, and franchising authorities are preempted from regulating
telecommunications services provided by cable operators and from requiring cable
operators to obtain a franchise to provide such services. The 1996 Act also
repeals the 1992 Cable Act's anti-trafficking provision which generally required
the holding of cable television systems for three years.
It is premature to predict the effect of the 1996 Act on the cable industry in
general or Cox in particular. The FCC must undertake numerous rulemaking
proceedings to interpret and implement the 1996 Act. Some of these rulemakings
have been completed, but all are subject to pending petitions for
reconsideration, appeals, or both. It is not possible at this time to predict
the outcome of those proceedings or their effect on Cox.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over cable
television, has promulgated regulations covering such areas as the registration
of cable television systems, cross-ownership between cable television systems
and other communications businesses, carriage of television broadcast
programming, consumer education and lockbox enforcement, origination
cablecasting and sponsorship identification, children's programming, the
regulation of basic cable service rates in areas where cable television systems
are not subject to effective competition, signal leakage and frequency use,
technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
may enforce these regulations through the imposition of substantial fines, the
issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. The 1992 Cable Act required the FCC to adopt additional regulations
covering, among other things, cable rates, broadcast signal carriage, consumer
protection and customer service, leased access, indecent programming, programmer
access to cable television systems, programming agreements, technical standards,
consumer electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, and various aspects of DBS system
ownership and operation. A brief summary of certain of these federal regulations
as adopted to date follows.
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RATE REGULATION. The 1992 Cable Act substantially changed the regulatory
environment. Although the regulation of premium channels is still prohibited,
the 1992 Cable Act replaced the FCC's effective competition test, under which
most cable systems were not subject to local rate regulation, with a statutory
provision that results in nearly all cable television systems becoming subject
to rate regulation. Additionally, the legislation eliminated the permissible
automatic 5% annual rate increase for regulated basic services previously
allowed by the 1984 Cable Act; required the FCC to adopt a formula for
franchising authorities to enforce to assure that basic cable rates are
reasonable; allowed the FCC to review rates for cable programming service tiers
(other than per-channel or per-event services) in response to complaints filed
by franchising authorities and/or cable customers; prohibited cable television
systems from requiring subscribers to purchase service tiers above basic service
in order to purchase premium services if the system is technically capable of
doing so; required the adoption of regulations by the FCC to establish, on the
basis of actual costs, the price for installation of cable service, remote
controls, converter boxes and additional outlets; and permitted the imposition
by the FCC of restrictions on the retiering and rearrangement of cable services,
under certain limited circumstances. The FCC's rules governing rates for the
regulation of basic and cable programming service tiers generally became
effective in September 1993.
In February 1994, the FCC revised its benchmark regulations adopted in April
1993. Effective May 1994, cable television systems not seeking to justify rates
with a cost-of-service showing were to reduce rates by up to 17% of the rates in
effect on September 30, 1992, adjusted for inflation, channel modifications,
equipment costs and certain increases in programming costs. Under certain
conditions systems were permitted to defer these rate adjustments until July 14,
1994. Further rate reductions for cable systems whose rates are below the
revised benchmark levels, as well as reductions that would require operators to
reduce rates below benchmark levels in order to achieve a 17% rate reduction
were held in abeyance pending completion of cable system cost studies. The FCC
recently adopted an order which made permanent its deferral of the full 17
percent rate reduction, and consequently these systems will not be required to
reduce their rates by the full competitive differential previously implemented
by the FCC.
The FCC also revised its regulations governing the manner in which cable
operators may charge subscribers for new channels added to cable programming
services tiers. The FCC instituted a three-year flat fee mark-up plan.
Commencing on January 1, 1995, operators may charge subscribers up to $.20 per
channel for any channels added after May 14, 1994, but may not make adjustments
to monthly rates totalling more than $1.20 plus an additional $.30 to cover
programming license fees for those channels over the first two years of the
three-year period. In year three, an additional channel may be added with
another $.20 increase in rates. Rates also may increase in the third year to
cover any additional costs for the programming for any of the channels added
during the entire three-year period. Cable operators electing to use the $.20
per channel adjustment may not also take a 7.5% mark-up on programming cost
increases, which is otherwise permitted under the FCC's regulations. The FCC has
requested further comment on whether cable operators should continue to receive
the 7.5% mark-up on increases in license fees on existing programming services.
The FCC will permit cable operators to exercise their discretion in setting
rates for New Product Tiers ("NPT") so long as, among other conditions, the
channels that are subject to rate regulation are priced in conformity with
applicable regulations and cable operators do not remove programming services
from existing rate-regulated service tiers and offer them on an NPT.
In September 1995, the FCC authorized a new, alternative method of
implementing rate adjustments which will allow cable operators to increase rates
for programming annually on the basis of projected increases in external costs
(programming costs, local regulatory fees and state and local taxes applicable
to the provision of cable television services), inflation and changes in the
number of regulated channels rather than on the basis of cost increases incurred
in the preceding quarter. Operators that elect not to recover all of their
accrued external costs and inflation pass-throughs each year may recover them
(with interest) in subsequent years. In March, 1997, the FCC implemented
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regulations that provide cable operators with the option of establishing uniform
rates throughout multiple franchise areas served by the same system. The FCC
will review proposals to implement uniform rates on a case by case basis.
In December 1995, the FCC adopted final cost-of-service rate regulations
requiring, among other things, cable operators to exclude 34% of system
acquisition costs related to intangible and tangible assets used to provide
regulated services. The FCC also reaffirmed the industry-wide 11.25% after tax
rate of return on an operator's allowable rate base, but initiated a further
rulemaking in which it proposed to use an operator's actual debt cost and
capital structure to determine an operator's cost of capital or rate of return.
After a rate has been set pursuant to a cost-of-service showing, rate increases
for regulated services are indexed for inflation, and operators are permitted to
increase rates in response to increases in costs beyond their control, such as
taxes and increased programming costs.
The 1996 Act amends the rate regulation provisions of the 1992 Cable Act.
Regulation of basic cable service continues in effect until a cable system
becomes subject to effective competition. Regulation of CPS rates will be
deregulated in franchise areas with more than 50,000 residents on March 31,
1999. The 1996 Act deregulates rates of small operators upon enactment where a
small cable operator serves 50,000 or fewer subscribers. A small cable operator
is defined as an operator that serves fewer than 1% of all subscribers and is
not affiliated with any entity whose gross annual revenues in the aggregate
exceed $250 million. Subscribers are no longer permitted to file programming
service complaints with the FCC, and complaints may only be brought by a
franchising authority if, within 90 days after a rate increase becomes
effective, it receives subscriber complaints. The FCC is required to act on such
complaints within 90 days. In addition to the existing definition of effective
competition, a new effective competition test permits deregulation of both basic
and CPS tier rates where a telephone company offers cable service by any means
(other than direct-to-home satellite services) provided that such service is
comparable to the services provided in the franchise area by the unaffiliated
cable operator. The uniform rate provision of the 1992 Cable Act is amended to
exempt bulk discounts to multiple dwelling units so long as a cable operator
that is not subject to effective competition does not charge predatory prices to
a multiple dwelling unit.
Franchising authorities in a number of communities in which Cox operates cable
television systems initiated basic service rate regulation pursuant to Section
623 of the Communications Act and corresponding regulations of the FCC and
required Cox to justify its existing basic service rates. In addition, certain
subscribers and franchising authorities filed complaints with the FCC pursuant
to Section 623 of the Communications Act and corresponding FCC regulations
challenging the reasonableness of Cox's rates for cable programming services.
Cox submitted rate justifications to these franchising authorities and filed
responses to the rate complaints with the FCC. Franchising authorities and the
FCC issued a number of rate decisions regarding basic and CPS rates, and the FCC
is currently processing several additional rate complaints.
On December 1, 1995, the FCC issued an order adopting the terms of a rate
settlement in the form of a proposed resolution between Cox and the FCC's Cable
Services Bureau (the "Resolution"). The order resolves the outstanding
programming service rate complaints covering all of Cox's systems as of June 30,
1995. The order provides for $7 million in refunds plus interest and covers one
million subscribers. The fees paid by the former TMCT subscribers for additional
outlets have been eliminated as of January 6, 1996 and account for virtually all
of the refund amount. The order also permits Cox to move as many as four
regulated services to a new tier in each franchise area where an a la carte
package previously was not provided, which provides Cox additional pricing
flexibility for this new tier. In addition, the order confirms that Cox's cable
programming service tier rates, as of June 30, 1995, are not unreasonable and
that the acceptance of the Resolution by the FCC does not constitute an
admission by Cox of any violation or failure to conform to any law, rule or
policy. On January 29, 1996, the City of Irvine and six other cities located in
California filed an appeal to set aside the order in the United States Court of
Appeals for the Ninth Circuit. The FCC is a party to the appeal and Cox has been
granted leave to intervene. In lieu of filing its brief, the FCC asked the Court
to remand the case so that it might issue an order that better explained the
reasons underlying its decision to accept the Resolution. The Court granted the
request, but the FCC has not yet issued a revised order. Cox cannot predict the
outcome of this appeal.
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CARRIAGE OF BROADCAST TELEVISION SIGNALS. The 1992 Cable Act contains new
signal carriage requirements. The FCC adopted rules implementing the must-carry
provisions for non-commercial and commercial stations and retransmission consent
for commercial stations in March 1993. These rules allow commercial television
broadcast stations which are "local" to a cable system, i.e., the system is
located in the station's Area of Dominant Influence ("ADI"), to elect every
three years whether to require the cable system to carry the station, subject to
certain exceptions, or whether to require the cable system to negotiate for
"retransmission consent" to carry the station. The first such election was made
in June 1993 and the second in October 1996. With the 1996 election , FCC rules
require broadcasters to use their DMA as the relevent television market for
must-carry purposes. A recent amendment to the Copyright Act of 1976 will in
some cases increase the number of stations that may elect must-carry status on
cable systems located within such stations' ADI. Cable systems must obtain
retransmission consent for the carriage of all "distant" commercial broadcast
stations, except for certain "superstations" (i.e., commercial satellite-
delivered independent stations such as WTBS). All commercial stations entitled
to carriage were to have been carried by June 1993, and any non-must-carry
stations (other than superstations) for which retransmission consent had not
been obtained could no longer be carried after October 5, 1993. A number of
stations previously carried by Cox's cable television systems elected
retransmission consent. Cox generally reached agreements with broadcasters who
elected retransmission consent or negotiated extensions to the retransmission
deadline and thus far has not been required to pay cash compensation to
broadcasters for retransmission consent. Cox has agreed to carry some services
(e.g., fX and ESPN2) in specified markets pursuant to retransmission consent
agreements which it believes are comparable to those entered into by most other
large cable television operators. Local non-commercial television stations are
also given mandatory carriage rights, subject to certain exceptions, within the
larger of: (i) a 50 mile radius from the station's city of license; or (ii) the
station's Grade B contour (a measure of signal strength). Unlike commercial
stations, non-commercial stations are not given the option to negotiate
retransmission consent for the carriage of their signal. The must-carry
provisions for non-commercial stations became effective in December 1992.
NONDUPLICATION OF NETWORK PROGRAMMING. Cable television systems that have
1,000 or more customers must, upon the appropriate request of a local television
station, delete the simultaneous or nonsimultaneous network programming of a
distant station when such programming has also been contracted for by the local
station on an exclusive basis.
DELETION OF SYNDICATED PROGRAMMING. FCC regulations enable television
broadcast stations that have obtained exclusive distribution rights for
syndicated programming in their market to require a cable system to delete or
"black out" such programming from other distant television stations which are
carried by the cable system. The extent of such deletions will vary from market
to market and cannot be predicted with certainty. However, it is possible that
such deletions could be substantial and could lead the cable operator to drop a
distant signal in its entirety. The FCC also has commenced a proceeding to
determine whether to relax or abolish the geographic limitations on program
exclusivity contained in its rules, which would allow parties to set the
geographic scope of exclusive distribution rights entirely by contract, and to
determine whether such exclusivity rights should be extended to noncommercial
educational stations. It is possible that the outcome of these proceedings will
increase the amount of programming that cable operators are required to black
out. Finally, the FCC has declined to impose equivalent syndicated exclusivity
rules on satellite carriers who provide services to the owners of home satellite
dishes similar to those provided by cable systems.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS. Prior to commencing
operation in a particular community, all cable television systems must file a
registration statement with the FCC listing the broadcast signals they will
carry and certain other information. Additionally, cable operators periodically
are required to file various informational reports with the FCC.
TECHNICAL REQUIREMENTS. Historically, the FCC has imposed technical standards
applicable to the cable channels on which broadcast stations are carried, and
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has prohibited franchising authorities from adopting standards which were in
conflict with or more restrictive than those established by the FCC. The FCC
revised its standards and made them applicable to all classes of channels which
carry downstream National Television System Committee ("NTSC") video
programming. Local franchising authorities are permitted to enforce the FCC's
new technical standards. The FCC also has adopted additional standards
applicable to cable television systems using frequencies in the 108-137 MHz and
225-400 MHz bands in order to prevent harmful interference with aeronautical
navigation and safety radio services and has also established limits on cable
system signal leakage. The 1992 Cable Act requires the FCC to periodically
update its technical standards to take into account changes in technology and to
entertain waiver requests from franchising authorities who seek to impose more
stringent technical standards upon their franchised cable television systems.
POLE ATTACHMENTS. The FCC currently regulates the rates, terms and conditions
imposed by certain public utilities for use of their poles, unless under the
Federal Pole Attachment Act state public utilities commissions are able to
demonstrate that they regulate rates, terms and conditions of the cable
television pole attachments. A number of states and the District of Columbia
have so certified to the FCC. In the absence of state regulation, the FCC
administers such pole attachment rates through use of a formula which it has
devised and from time to time revises. Recently the FCC initiated a proceeding
to determine whether it should make other adjustments to the current pole
attachment formula which, if implemented, generally would result in an increase
in pole attachment rates. The 1996 Act extends the regulation of rates, terms
and conditions of pole attachments to telecommunications service providers, and
requires the FCC to prescribe regulations to govern the charges for pole
attachments used by telecommunications carriers to provide telecommunications
services when the parties fail to resolve the dispute over such charges. The
1996 Act, among other provisions, increases significantly future pole attachment
rates for cable systems which use pole attachments in connection with the
provision of telecommunications services as a result of a new rate formula
charged to telecommunication carriers for the non-useable space of each pole.
These rates are to be phased in after a five-year period.
REGULATORY FEES AND OTHER MATTERS. Pursuant to the Communications Act, the
FCC has adopted requirements for payment of annual "regulatory fees" by the
various industries it regulates, including the cable television industry.
Currently, cable television systems are required to pay regulatory fees of $0.55
per subscriber per year, which may be passed on to subscribers as "external
cost" adjustments to rates for basic cable service. Fees are also assessed for
other licenses, including licenses for business radio and cable television relay
systems (CARS). Those fees, however, may not be collected directly from
subscribers.
In addition, the FCC has adopted regulations pursuant to the 1992 Cable Act
which require cable systems not subject to effective competition to permit
customers to purchase video programming on a per-channel or a per-event basis
without the necessity of subscribing to any tier of service, other than the
basic service tier, unless the cable system is technically incapable of doing
so. Generally cable systems must become technically capable of complying with
the statutory obligation by December 2002. Consistent with its statutory
obligations, the FCC also has adopted a number of measures for improving
compatibility between existing cable systems and consumer electronics equipment,
including a prohibition from scrambling program signals carried on the basic
tier, absent a waiver. The FCC also is considering whether to extend this
prohibition to cover all regulated tiers of programming.
In December 1994, the FCC announced that its longstanding Emergency Broadcast
System rules were to be replaced. The new rules establish cable television and
broadcast technical standards to support a new Emergency Alert System. Cable
operators must install and activate equipment necessary for the new system by
July 1, 1997.
FCC regulations also address the carriage of local sports programming;
restrictions on origination and cablecasting by cable system operators;
application of the rules governing political broadcasts; customer service
standards; home wiring and limitations on advertising contained in nonbroadcast
children's programming. The FCC has initiated a rulemaking to consider, among
other issues, whether to adopt uniform regulations governing telephone and cable
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inside wiring. The regulations ultimately adopted by the FCC could affect Cox's
ownership and access to inside wiring used to provide telephony and video
programming services particularly with regard to the provision of services to
multiple dwelling unit buildings. In a related rulemaking proceeding, the FCC
will consider the appropriate treatment of inside wiring in multiple dwelling
unit buildings. The outcome of that rulemaking could affect cable operators'
access to inside wiring in MDUs which they currently serve.
CONSUMER EQUIPMENT. The 1996 Act requires the FCC, in consultation with
industry standard-setting organizations, to adopt regulations which would
encourage commercial availability to consumers of all services offered by
multichannel video programming distributors, such as converter boxes,
interactive communications equipment and other equipment used by consumers to
access multichannel video programming. The FCC has initiated a proceeding
seeking comment as to how to implement its obligations under the 1996 Act.
Pursuant to the 1996 Act, the regulations adopted may not prohibit programming
distributors from offering consumer equipment, so long as the cable operator's
rates for such equipment are not subsidized by charges for the services offered.
The rules also may not compromise the security of the services offered, or the
efforts of service providers from preventing theft of service. The FCC may waive
these rules so as not to hinder the development of advanced services and
equipment. The 1996 Act also requires the FCC to examine the market for closed
captioned programming and prescribe regulations which ensure that video
programming, with certain exceptions, is fully accessible through closed
captioning and the FCC has initiated a proceeding to prescribe such rules.
FRANCHISE FEES AND OBLIGATIONS. Although franchising authorities may impose
franchise fees under the 1984 Cable Act, such payments cannot exceed 5% of a
cable system's annual gross revenues. Franchising authorities are also empowered
in awarding new franchises or renewing existing franchises to require cable
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
RENEWAL OF FRANCHISES. The 1984 Cable Act established renewal procedures and
criteria designed to protect incumbent franchisees against arbitrary denials of
renewal. These formal procedures are mandatory only if timely invoked by either
the cable operator or the franchising authority. Even after the formal renewal
procedures are invoked, franchising authorities and cable operators remain free
to negotiate a renewal outside the formal process. Although the procedures
provide substantial protection to incumbent franchisees, renewal is by no means
assured, as the franchisee must meet certain statutory standards. Even if a
franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
The 1992 Cable Act made several changes to the renewal process which could
make it easier in some cases for a franchising authority to deny renewal. The
cable operator's timely request to commence renewal proceedings must be in
writing and the franchising authority must commence renewal proceedings not
later than six months after receipt of such notice. Within a four-month period
beginning with the submission of the renewal proposal, the franchising authority
must grant or preliminarily deny the renewal. Franchising authorities may
consider the "level" of programming service provided by a cable operator in
deciding whether to renew. Franchising authorities are no longer precluded from
denying renewal based on failure to substantially comply with the material terms
of the franchise where the franchising authority has "effectively acquiesced" to
such past violations. Rather, the franchising authority is estopped only if,
after giving the cable operator notice and opportunity to cure, the authority
fails to respond to a written notice from the cable operator of its failure or
inability to cure. Courts may not reverse a denial of renewal based on
procedural violations found to be "harmless error."
COMPETING FRANCHISES. Questions concerning the ability of municipalities to
award a single cable television franchise and to impose certain franchise
restrictions upon cable television companies have been considered in several
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recent federal appellate and district court decisions. These decisions have been
somewhat inconsistent and, until the United States Supreme Court rules
definitively on the scope of cable television's First Amendment protections, the
legality of the franchising process and of various specific franchise
requirements is likely to be in a state of flux. It is not possible at the
present time to predict the constitutionally permissible bounds of cable
franchising and particular franchise requirements. However, the 1992 Cable Act,
among other things, prohibits franchising authorities from unreasonably refusing
to grant franchises to competing cable television systems and permits
franchising authorities to operate their own cable television systems without
franchises.
CHANNEL SET-ASIDES. The 1984 Cable Act permits local franchising authorities
to require cable operators to set aside certain channels for public, educational
and governmental access programming. The 1984 Cable Act further requires cable
television systems with 36 or more activated channels to designate a portion of
their channel capacity for commercial leased access by unaffiliated third
parties. While the 1984 Cable Act allowed cable operators substantial latitude
in setting leased access rates, the 1992 Cable Act requires leased access rates
to be set according to an FCC-prescribed formula. The FCC has adopted rules
regulating: (i) the maximum reasonable rate a cable operator may charge for
commercial use of the designated channel capacity; (ii) the terms and conditions
for commercial use of such channels; and (iii) the procedures for the expedited
resolution of disputes concerning rates or commercial use of the designated
channel capacity. The FCC recently reconsidered and revised the formula
governing the rates that may be charged for the use of leased access channels.
The new formula, which will result in a downward adjustment in such rates, has
been appealed by a party seeking a further adjustment.
OWNERSHIP. The FCC rules generally prohibit the direct or indirect common
ownership, operation, control or interest in a cable television system, on the
one hand, and a local television broadcast station whose television signal
(predicted grade B contour as defined under FCC regulations) reaches any portion
of the community served by the cable television system, on the other hand. For
purposes of the cross-ownership rules, "control" of licensee companies is
attributed to all 5% or greater stockholders, except for mutual funds, banks and
insurance companies which may own less than 10% without attribution of control.
This rule prohibits Cox from owning or operating a cable television system in
the same area in which CEI or one of CEI's subsidiaries owns or operates a
television broadcast station. The FCC has requested comment as to whether to
raise the attribution criteria from 5% to 10% and for passive investors from 10%
to 20%, and whether it should exempt from attribution certain widely held
limited partnership interests where each individual interest represents an
insignificant percentage of total partnership equity. The 1996 Act eliminated
the statutory ban on the cross-ownership of a cable system and a television
station, and permits the FCC to amend or revise its own regulations regarding
the cross-ownership ban. The FCC's rule remains in effect. The FCC recently
lifted its ban on the cross-ownership of cable television systems by broadcast
networks and revised its regulations to permit broadcast networks to acquire
cable television systems serving up to 10% of the homes passed in the nation,
and up to 50% of the homes passed in a local market. The local limit would not
apply in cases where the network-owned cable system competes with another cable
operator.
Finally, in order to encourage competition in the provision of video
programming, the FCC adopted a rule in 1993 prohibiting the common ownership,
affiliation, control or interest of cable television systems and MMDS facilities
having overlapping service areas, except in very limited circumstances. However,
the 1996 Act permits co-ownership of MMDS and cable systems in areas where the
cable operator is subject to effective competition. The 1992 Cable Act also
codified this restriction and extended it to co-located SMATV systems, except
that a cable system may acquire a co-located SMATV system if it provides cable
service to the SMATV system in accordance with the terms of its cable television
franchise. Under the 1992 Cable Act, permitted arrangements in effect as of
October 5, 1992 were grandfathered. The 1992 Cable Act permits states or local
franchising authorities to adopt certain additional restrictions on the transfer
of ownership of cable television systems.
The cross-ownership prohibitions would preclude investors from holding
ownership interests in Cox if they simultaneously served as officers or
directors of, or held an attributable ownership interest in, these other
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businesses, and would also preclude Cox from acquiring a cable television system
when Cox's officers or directors served as officers or directors of, or held an
attributable ownership in, these other businesses which were located within the
same area as the cable system which was to be acquired.
The 1996 Act generally restricts common carriers from holding greater than a
10% financial interest or any management interest in cable operators which
provide cable service within the carrier's telephone exchange service area or
from entering joint ventures or partnerships with cable operators in the same
market subject to four general exceptions which include population density and
competitive market tests. The FCC may waive the buyout restrictions if it
determines that, because of the nature of the market served by the cable system
or the telephone exchange facilities, the cable operator or LEC would be subject
to undue economic distress by enforcement of the restrictions, the system or LEC
facilities would not be economically viable if the provisions were enforced, the
anticompetitive effects of the proposed transaction clearly would be outweighed
by the public interest in serving the community, and the local franchising
authority approves the waiver.
Pursuant to the 1992 Cable Act, the FCC has imposed regulatory ownership
restrictions on the number of cable systems which a single cable operator may
own. In general, no cable operator may hold an attributable interest in cable
systems which pass more than 30% of all homes nationwide. Attributable interests
for these purposes include voting interests of 5% or more (unless there is
another single holder of more than 50% of the voting stock), officerships,
directorships and general partnership interests. The FCC has stayed the
effectiveness of these rules pending the outcome of the appeal of the United
States District Court decision holding the multiple ownership limit provision of
the 1992 Cable Act unconstitutional. The appeal of that decision has been
consolidated with an appeal of the FCC's regulatory ownership restrictions. The
FCC also has adopted rules which limit the number of channels on a cable system
that can be occupied by programming in which the entity that owns the cable
system has an attributable interest. The limit is 40% of all activated channels.
Federal cross-ownership restrictions have previously limited entry into the
cable television business by potentially strong competitors such as telephone
companies. The 1996 Act repeals the cross-ownership ban and provides that
telephone companies may operate cable television systems within their own
service areas.
The 1996 Act will enable telephone companies to provide video programming
services as common carriers, cable operators or open video system ("OVS")
operators. If OVS systems become widespread in the future, cable television
systems could be placed at a competitive disadvantage because, unlike OVS
operators, cable television systems are required to obtain local franchises to
provide cable television service and must comply with a variety of obligations
under such franchises. Under the 1996 Act, common carriers leasing capacity for
the provision of video programming services over cable systems or OVS operators
are not bound by the interconnection obligations of Title II, which otherwise
would require the carrier to make capacity available on a nondiscriminatory
basis to any other person for the provision of cable service directly to
subscribers. Additionally, under the 1996 Act, common carriers providing video
programming are not required to obtain a Section 214 certification to establish
or operate a video programming delivery system.
Common carriers that qualify as OVS operators are exempt from many of the
regulatory obligations that currently apply to cable operators. However, certain
restrictions and requirements that apply to cable operators will still be
applicable to OVS operations. Common carriers that elect to provide video
services over an OVS may do so upon obtaining certification by the FCC. Among
other requirements, the 1996 Act prohibits OVS operators from discriminating in
the provision of video programming services and requires OVS operators to limit
carriage of video services selected by the OVS operator to one-third of the
OVS's capacity. OVS operators must also comply with the FCC's sports
exclusivity, network nonduplication and syndicated exclusivity restrictions,
public, educational, and government channel use requirements, the "must-carry"
requirements of the 1992 Cable Act, and regulations that prohibit
anticompetitive behavior or discrimination in the prices, terms and conditions
of providing vertically integrated satellite-delivered programming. The manner
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in which OVS operators will be treated as cable operators for purposes of
copyright liability has not yet been determined by the Copyright Office. Upon
compliance with such requirements and FCC rules that mirror statutory
requirements, an OVS operator will be exempt from various statutory restrictions
which apply to cable operators, such as broadcast-cable ownership restrictions,
commercial leased access requirements, franchising, rate regulation, and
consumer electronics compatibility requirements. Although OVS operators are not
subject to franchise fees, as defined by the 1996 Act, they may be subject to
fees charged by local franchising authorities or other governmental entities in
lieu of franchise fees. Such fees may not exceed the rate at which franchise
fees are imposed on cable operators and may be itemized separately on subscriber
bills.
The FCC has ruled that cable operators may opt to operate OVS systems, but
only if they are subject to effective competition. Under the FCC's rules, a
cable operator may not terminate an existing franchise agreement in order to
become an OVS operator. An appeal of these rules is currently pending in the
United States Court of Appeals for the Fifth Circuit.
TELECOMMUNICATIONS REGULATION. The telecommunications services currently
offered by Cox affiliates and Sprint PCS are subject to varying degrees of
federal, state and local regulation. The FCC exercises jurisdiction over all
facilities of, and services offered by, telecommunications service providers to
the extent that those facilities are used to provide, originate and terminate
interstate or international communications.
LANDLINE TELECOMMUNICATIONS SERVICES. While the current switched voice and
data market is dominated by local exchange companies, also known as incumbent
LECs, the 1996 Act presents new opportunities for new entrants into these
markets. The LECs provide a full range of local telecommunications services and
equipment to customers, as well as originating and terminating access to their
local networks to interexchange carriers and commercial mobile radio service
providers. Because LECs historically have had exclusive state franchises by law
to provide telephone services, they have established monopoly relationships with
their customers. Under the new law and subject to certain exemptions for rural
telephone companies, the FCC is directed to preempt any state law or regulation
that acts to prevent new competitive entry into incumbent LEC markets.
The 1996 Act also eliminates the interexchange (interLATA) restrictions
contained in the Modified Final Judgment, the 1981 consent decree, and
establishes procedures under which a Bell Operating Company (BOC) can enter the
market for interLATA services within its telephone service area. Before a BOC
can enter the landline interLATA market, it must enter into a state-approved
interconnection agreement with a company that provides local exchange service to
business and residential customers predominantly over its own facilities.
Alternatively, if no such competitor requests interconnection, the BOC can
request authority to provide interLATA services if it offers interconnection
pursuant to state-approved terms and conditions. The interconnection provided by
the BOC must comply with a "competitive checklist". Many, if not all, of the
BOCs are currently preparing applications for FCC approval to provide interLATA
services.
REGULATORY REQUIREMENTS FOR ALL LECS, INCLUDING NEW ENTRANTS. Under the 1996
Act, new landline entrants will become subject to additional federal regulatory
requirements when they provide local exchange service in any market. The 1996
Act imposes a number of access and interconnection requirements on all LECs,
with additional requirements imposed on incumbent LECs. Specifically, the 1996
Act required the FCC to implement rules under which all LECs must provide
telephone number portability, dialing parity, reciprocal compensation for
traffic transport and termination, resale and access to rights of way. In
addition, the 1996 Act specifies procedures for state commissions to review and
approve both voluntary and compulsory interconnection agreements entered into
between new entrants and incumbent LECs. These requirements also place burdens
on new entrants that may benefit other competitors. In particular, the resale
requirement means that a company can seek to resell the facilities of a new
entrant without making a similar investment in facilities.
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One of the primary goals of the original Communications Act of 1934 was to
extend telephone service to all citizens of the United States. This goal has
been achieved primarily by maintaining the rates for basic local exchange
service at a reasonable level. It was widely accepted that incumbent LECs were
able to maintain relatively low local rates by subsidizing them with revenues
from business and toll services, and by subsidizing rural service at the expense
of urban customers. The extent of these subsidies has been widely disputed and
incumbent LECs that have this information generally have not made it available
for review and verification.
The 1996 Act continues the goal of preserving and advancing universal service
by requiring the FCC to establish an explicit mechanism for subsidizing service
to those who might otherwise drop off the public switched telephone network.
Although the details will be determined by the FCC as it considers the
recommendations of a Federal-State joint board of regulators, the legislation
specifies that all telecommunications carriers will be required to contribute
and carriers that serve eligible customers can apply to receive subsidies. State
universal service programs may also continue in effect so long as they are
administered on a competitively neutral basis.
Depending upon how the FCC implements its statutory mandate and states adjust
their existing programs, this subsidy mechanism may provide an additional source
of revenue to those LECs willing and able to provide service to those markets
that are less financially desirable, either because of the high cost of
providing service or the limited revenues that might be available from serving a
particular subset of customers in an area, i.e., residential customers.
Another goal of the 1996 Act is to increase competition for telecommunications
services, thereby reducing the need for continuing regulation of these services.
To this end the 1996 Act requires the FCC to streamline its regulation of
incumbent LECs and permits the FCC to forbear from regulating particular classes
of telecommunications services or providers, including relaxation or potentially
eventual termination of FCC service tariffing requirements.
The 1996 Act eliminates the requirement that incumbent LECs obtain FCC
authorization prior to constructing facilities for interstate services. The 1996
Act also limits the FCC's ability to review incumbent LEC tariff filings. These
changes will increase the speed with which incumbent LECs are able to introduce
new service offerings and new pricing of existing services, thereby increasing
their flexibility to respond to new entrants.
In addition to incumbent LECs and existing competitive access providers, new
entrants potentially capable of offering switched and non-switched services
include individual cable television companies, electric utilities, long distance
carriers, microwave carriers, wireless service providers, resellers and private
networks built by large end-users.
BROADBAND PCS AUCTION. In the 1993 Budget Act, Congress gave the FCC the
authority to preempt states from regulating the entry of or the rates charged by
any Commercial Mobile Radio Service ("CMRS") provider, including PCS providers.
On February 3, 1994, the FCC adopted rules implementing the 1993 Budget Act and
created the CMRS regulatory classification. The CMRS classification applies to
all mobile services (including PCS) that are for profit and that provide
interconnected service to the public or a substantial portion of the public. At
that time, the FCC preempted state regulation and established a procedure for
states to petition the FCC for authority to regulate CMRS rates. Eight states
submitted requests to continue regulation of cellular providers within their
jurisdictions. On May 19, 1995, the FCC released orders denying the requests.
States are permitted under the 1993 Budget Act to regulate "other terms and
conditions" of CMRS, including the siting and zoning of CMRS equipment. A
petition for rulemaking is pending before the FCC requesting that the FCC
preempt state and local siting and zoning regulation to the extent such
regulation acts to inhibit or prevent entry into the CMRS marketplace. The
petition generally has been opposed by state and local governments and supported
by CMRS providers and potential PCS providers. The 1996 Act contains a provision
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prohibiting state and local governments from discriminating in their zoning
decisions that apply to personal wireless service facilities and enforcing rules
or regulations that prevent the provision of wireless services.
Additionally, the 1996 Act specifically determined that CMRS providers are not
required to provide equal access to interexchange carriers for the provision of
interexchange services. While the FCC has prescribed rules for the unblocking of
access to a preferred interexchange carrier, the legislation does away with the
equal access requirement imposed on the wireless affiliates of the BOCs. In
addition, the 1996 Act permits the BOCs, on enactment, to provide interexchange
service to their cellular customers.
The FCC has allocated 120 MHz of spectrum in the 2 GHz band to be licensed to
competing broadband PCS providers, which it is anticipated will offer advanced
digital wireless services in competition with current cellular and specialized
mobile radio services as well as with landline telephone service. Broadband PCS
spectrum was first auctioned by Major Trading Area (MTA) licenses by the FCC in
an auction which ended in mid-March 1995. Six broadband PCS licenses have been
auctioned in each service area (except that only five licenses were auctioned in
the three markets in which pioneer preference licenses were issued), and FCC
rules permit some aggregation and disaggregation of PCS spectrum by PCS
operators. The first broadband PCS auction included two 30 MHz frequency blocks
of spectrum (Blocks "A" and "B") licensed by MTA. The second auction was for 30
MHz blocks of broadband spectrum, licensed using Basic Trading Areas (Block "C"
auction). Block C licenses were available only to parties that met specific FCC
eligibility criteria. A Basic Trading Area spectrum block, Block "F," was also
auctioned only to parties meeting specific eligibility criteria following the
Block "C" auction. The FCC has recently concluded its final PCS auctions for the
F Block and two Basic Trading Area 10 MHz blocks of spectrum, Blocks "D" and
"E," which will not be subject to the additional eligibility requirements
imposed on Blocks "C" and "F."
STATE AND LOCAL REGULATION
CABLE TELEVISION REGULATION. Because a cable television system uses local
streets and rights-of-way, cable television systems are subject to state and
local regulation, typically imposed through the franchising process. Consistent
with the Communications Act, state and/or local officials are usually involved
in franchise selection, system design and construction, safety, service rates,
consumer relations, billing practices and community related programming and
services.
Cable television systems generally are operated pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchise operator fails to comply with
material provisions. Although the 1984 Cable Act provides for certain procedural
protections, there can be no assurance that renewals will be granted or that
renewals will be made on similar terms and conditions. Franchises usually call
for the payment of fees, often based on a percentage of the system's gross
customer revenues, to the granting authority. Upon receipt of a franchise, the
cable system owner usually is subject to a broad range of obligations to the
issuing authority directly affecting the business of the system. The terms and
conditions of franchises vary materially from jurisdiction to jurisdiction, and
even from city to city within the same state, historically ranging from
reasonable to highly restrictive or burdensome. The 1984 Cable Act places
certain limitations on a franchising authority's ability to control the
operation of a cable system, and courts have from time to time reviewed the
constitutionality of several general franchise requirements, including franchise
fees and access channel requirements, often with inconsistent results. On the
other hand, the 1992 Cable Act prohibits exclusive franchises and allows
franchising authorities to exercise greater control over the operation of
franchised cable television systems, especially in the area of customer service
and rate regulation. The 1992 Cable Act also allows franchising authorities to
operate their own multichannel video distribution system without having to
obtain a franchise and permits states or local franchising authorities to adopt
certain restrictions on the ownership of cable television systems. Moreover,
franchising authorities have immunity from monetary damage awards arising from
regulation of cable television systems or decisions made on franchise grants,
renewals, transfers and amendments.
35
<PAGE>
The specific terms and conditions of a franchise and the laws and regulations
under which it was granted directly affect the profitability of the cable
television system. Cable franchises generally contain provisions governing
charges for basic cable television services, fees to be paid to the franchising
authority, length of the franchise term, renewal, sale or transfer of the
franchise, territory of the franchise, design and technical performance of the
system, use and occupancy of public streets and number and types of cable
services provided.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the cable television or
telephony industries. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements currently are
the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television or telephony systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television or
telephony industries can be predicted at this time.
The government of Mexico has authorized the allocation of a new broadcast
station on channel 3 in Tijuana, Mexico, which if constructed, will cause
interference with the operations of the Company's cable system serving the San
Diego area. The Company provides its subscribers with converters which are
tuned to channel 3, and ingress from the station's signal wall cause co-channel
interference on the system in those areas of the San Diego market where the
station's signal is received. The United States Government has requested the
Mexican government to modify its proposed allocation. If the Mexican government
declines, the Company would be required to incur significant expenses to retune
subscribers' converters to a different channel. Cable reception in those
franchise areas where the station could be received would be disrupted until the
converters were retuned.
EMPLOYEES
At December 31, 1996, Cox had approximately 7,200 full-time-equivalent
employees. Cox considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
Cox's principal physical assets consist of cable television operating plant
and equipment, including signal receiving, encoding and decoding devices,
headends and distribution systems and customer house drop equipment for each of
its cable television systems. The signal receiving apparatus typically includes
a tower, antenna, ancillary electronic equipment and earth stations for
reception of satellite signals. Headends, consisting of associated electronic
equipment necessary for the reception, amplification and modulation of signals,
are located near the receiving devices. Cox's distribution system consists
primarily of coaxial and fiber optic cables and related electronic equipment.
Customer devices consist of decoding converters. The physical components of
cable television systems require maintenance and periodic upgrading to keep pace
with technological advances.
Cox's cable distribution plant and related equipment are generally attached to
utility poles under pole rental agreements with local public utilities, although
in some areas the distribution cable is buried in underground ducts or trenches.
Cox owns or leases parcels of real property for signal reception sites (antenna
towers and headends), microwave facilities and business offices in each of its
market areas and leases most of its service vehicles. Cox believes that its
properties, both owned and leased, taken as a whole, are in good operating
condition and are suitable and adequate for Cox's business operations.
36
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Cox is a party to various legal proceedings that are ordinary and incidental
to its business. Management does not expect that any legal proceedings currently
pending, individually or in the aggregate, will have a material adverse effect
on Cox or its business or operations. See Note 16 to the Consolidated Financial
Statements included in Cox's 1996 Annual Report to Stockholders and incorporated
herein by reference (see Exhibit 13).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cox held its 1996 Annual Meeting of Stockholders on May 7, 1996. Two matters
were voted upon at the meeting: (a) the election of a Board of Directors of
seven members to serve until the 1997 Annual Meeting or until their successors
are duly elected and qualified; and (b) ratification of the appointment by the
Board of Directors of Deloitte & Touche LLP, independent certified public
accountants, as Cox's independent auditors for the year ending December 31,
1996.
The following directors were elected and they received the votes indicated:
VOTES
IN FAVOR OF WITHHELD
----------- --------
James C. Kennedy 383,026,502 579,883
Janet Morrison Clarke 383,227,225 379,360
John R. Dillon 383,025,987 580,398
David E. Easterly 383,026,481 579,904
Robert F. Erburu 382,994,061 612,324
James O. Robbins 383,026,540 579,845
Andrew J. Young 383,205,099 401,286
Ratification of Deloitte & Touche LLP as independent auditors for the fiscal
year ending December 31, 1996 was approved with 383,544,498 votes in favor,
15,104 votes opposed and 45,783 abstentions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Except as set forth below, the information required by this Item is incorporated
by reference to the back cover of Cox's 1996 Annual Report to Stockholders (see
Exhibit 13).
In June 1995, concurrent with its public offering of shares of Class A Common
Stock, the Company agreed to issue shares of Class A Common Stock to CEI in a
private placement (the "CEI Purchase"). Pursuant to the CEI Purchase, CEI
acquired 8,298,755 shares of Class A Common Stock at $18.075 per share, the
price offered to the public per share, less the underwriting discounts and
commissions thereon. CEI holds these shares of Class A Common Stock for
investment purposes.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page 18
of Cox's 1996 Annual Report to Stockholders (see Exhibit 13).
37
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to pages 19
through 25 of Cox's 1996 Annual Report to Stockholders (see Exhibit 13).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Except as set forth below, the information required by this Item is
incorporated by reference to pages 26 through 48 of Cox's 1996 Annual Report to
Stockholders (see Exhibit 13).
The information required by this Item with respect to Cox California PCS, Inc.
is included at Exhibit 99.1.
The information required by this Item with respect to Sprint Spectrum Holding
Company, L.P. is included at Exhibit 99.2.
The information required by this Item with respect to Teleport Communications
Group Inc. is incorporated by reference to the financial statements contained in
the Form 10-K for the fiscal year ended December 31, 1996 filed by Teleport
Communications Group Inc. (Commission File No. 0-20913) (See Exhibit 99.3).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1997 Annual Meeting of Stockholders.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents incorporated by reference or filed with this Report
(1) The financial statements set forth on pages 26 through 48 of the
1996 Annual Report to Stockholders are incorporated herein by
reference (see Exhibit 13). The financial statements required by
Item 8 with respect to Cox California PCS, Inc. are incorporated by
reference herein (see Exhibit 99.1). The financial statements
required by Item 8 with respect to Sprint Spectrum Holding Company,
L.P. are incorporated by reference herein (see Exhibit 99.2). The
financial statements required by Item 8 with respect to Teleport
Communications Group Inc. are incorporated by reference herein (see
Exhibit 99.3).
(2) No financial statement schedules are required to be filed by Items 8
and 14(d) because they are not required or are not applicable, or
the required information is set forth in the applicable financial
statements or notes thereto.
(3) Exhibits required to be filed by Item 601 of Regulation S-K:
Listed below are the exhibits which are filed as part of this Report
(according to the number assigned to them in Item 601 of Regulation
S-K):
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------
2.1 -- Agreement and Plan of Merger, dated as of June 5, 1994, by and
among The Times Mirror Company, New TMC Inc., Cox Communications,
Inc. and Cox Enterprises, Inc. (Incorporated by reference to
Exhibit 2.1 to Cox's Registration Statement on Form S-4, File No.
33-80152, filed with the Commission on December 16, 1994.)
2.2 -- Amendment No. 1, dated as of December 16, 1994, to Agreement and
Plan of Merger by and among The Times Mirror Company, New TMC
Inc., Cox Communications, Inc. and Cox Enterprises, Inc.
(Incorporated by reference to Exhibit 2.2 to Cox's Registration
Statement on Form S-4, File No. 33-80152, filed with the
Commission on December 16, 1994.)
2.3 -- Amendment No. 2, dated as of January 30, 1995, to Agreement and
Plan of Merger by and among The Times Mirror Company, New TMC
Inc., Cox Communications, Inc., and Cox Enterprises, Inc.
(Incorporated by reference to Exhibit 2.3 to Cox's Current Report
on Form 8-K filed with the Commission on February 15, 1995.)
3.1 -- Amended Certificate of Incorporation of Cox Communications, Inc.
(Incorporated by reference to Exhibit 3.1 to Cox's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.)
3.2 -- Bylaws of Cox Communications, Inc. (Incorporated by reference to
Exhibit 3.2 to Cox's Registration Statement on Form S-4, File No.
33-80152, filed with the Commission on December 16, 1994.)
4.1 -- Indenture dated as of June 27, 1995 between Cox Communications,
Inc. and The Bank of New York, as Trustee, relating to the 6 3/8 %
Notes due 2000, 6 1/2 % Notes due 2002, 6 7/8 Notes due 2005, 7
1/4 % Debentures due 2015 and the 7 5/8 % Debentures due 2025 of
Cox Communications, Inc. (Incorporated by reference to Exhibit 4.1
to Cox's Registration Statement on Form S-1, File No. 33-99116,
filed with the Commission on November 8, 1995.)
10.1 -- Amended and Restated Agreement of Limited Partnership of MajorCo,
L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P.,
TCI Network Services, Comcast Telephony Services and Cox Telephony
Partnership. * (Incorporated by reference to Exhibit 10.1 to Cox's
Current Report on Form 8-K filed with the Commission on February
9, 1996.)
39
<PAGE>
10.2 -- Second Amended and Restated Joint Venture Formation Agreement,
dated as of January 31, 1996, by and between Sprint Corporation,
Tele-Communications, Inc., Comcast Corporation and Cox
Communications, Inc. * (Incorporated by reference to Exhibit 10.2
to Cox's Current Report on Form 8-K filed with the Commission on
February 9, 1996.)
10.3 -- Parents Agreement, dated as of January 31, 1996 between Cox
Communications, Inc and Sprint Corporation. * (Incorporated by
reference to Exhibit 10.3 to Cox's Current Report on Form 8-K
filed with the Commission on February 9, 1996.)
10.4 -- Amended and Restated Agreement of Limited Partnership of
PhillieCo, L.P., dated as of February 17, 1995, by and among
Sprint Spectrum, Inc., TCI Network, Inc. and Cox Communications
Wireless, Inc. (Incorporated by reference to Exhibit 10.4 to the
Annual Report on Form 10-K of Cox Communications, Inc., filed with
the Commission on March 31, 1995.)
10.5 -- Contribution Agreement, dated as of March 28, 1995, by and among
TCI Network Services, Comcast Telephony Services, Cox Telephony
Partnership, MajorCo, L.P. and Newtelco, L.P. (Incorporated by
reference to Exhibit 10.5 to the Annual Report on Form 10-K of Cox
Communications, Inc., filed with the Commission on March 31,
1995.)
10.6 -- Registration Rights Agreement, dated as of January 31, 1995, by
and between Cox Communications, Inc., and Bank of America National
Trust and Savings Association, Thomas Unterman, James F. Guthrie,
James R. Simpson, Robert F. Erburu and David Laventhol, each as
trustees for certain employee benefit plans of The Times Mirror
Company. (Incorporated by reference to Exhibit 10.6 to the Annual
Report on Form 10-K of Cox Communications, Inc., filed with the
Commission on March 31, 1995.)
10.7 -- Tax Allocation Agreement, dated as of February 1, 1995, by and
between Cox Enterprises, Inc. and Cox Communications, Inc.
(Incorporated by reference to Exhibit 10.7 to the Annual Report on
Form 10-K of Cox Communications, Inc., filed with the Commission
on March 31, 1995.)
10.8 -- Asset Purchase Agreement, dated as of November 8, 1994, by and
between Newport News Cablevision, Ltd. and Cox Cable Hampton
Roads, Inc. (Incorporated by reference to Exhibit 10.8 to the
Annual Report on Form 10-K of Cox Communications, Inc., filed with
the Commission on March 31, 1995.)
10.9 -- Cox Executive Supplemental Plan of Cox Enterprises, Inc.
(Incorporated by reference to Exhibit 10.5 to Cox's Registration
Statement on Form S-4, File No. 33-80152, filed with the
Commission on December 16, 1994.)
10.10 -- Cox Communications, Inc. Long-Term Incentive Plan. (Incorporated
by reference to Exhibit 10.8 to Cox's Registration Statement on
Form S-4, File No. 33-80152, filed with the Commission on December
16, 1994.)
10.11 -- Cox Communications, Inc. Restricted Stock Plan for Non-Employee
Directors. (Incorporated by reference to Exhibit 10.9 to Cox's
Registration Statement on Form S-4, File No. 33-80152, filed with
the Commission on December 16, 1994.)
10.12 -- 5-Year Credit Agreement, dated as of January 24, 1995, by and
among Cox Communications, Inc., Texas Commerce Bank National
Association and Chemical Bank, individually and as agents, and the
other banks signatory thereto. (Incorporated by reference to
Exhibit 10.13 to the Annual Report on Form 10-K of Cox
Communications, Inc., filed with the Commission on March 31,
1995.)
10.13 -- 364-Day Credit Agreement, dated January 24, 1995, by and among Cox
Communications, Inc., Texas Commerce Bank National Association and
Chemical Bank, individually and as agents, and the other banks
signatory. (Incorporated by reference to Exhibit 10.14 to the
Annual Report on Form 10-K of Cox Communications, Inc., filed with
the Commission on March 31, 1995.)
10.14 -- Assumption and Amendment Agreement, dated as of February 1, 1995,
among Cox Communications, Inc., Texas Commerce Bank National
Association, individually and as agent, and the other bank
signatory. (Incorporated by reference to Exhibit 10.15 to the
Annual Report on Form 10-K of Cox Communications, Inc., filed with
the Commission on March 31, 1995.)
40
<PAGE>
10.15 -- Form of Letter Agreement between Cox Enterprises, Inc. and Cox
Communications, Inc. relating to the CEI Purchase. (Incorporated
by reference to Exhibit 10.16 to Cox's Amendment No. 2 to
Registration Statement on Form S-1, File No. 33-92000, filed with
the Commission on June 21, 1995.)
10.16 -- Share Exchange Agreement, dated August 11, 1995, among
Southwestern Bell International Holdings (UK-1) Corporation,
Southwestern Bell International Holdings (UK-2) Corporation, Cox
UK Communications, LP, TeleWest plc, TeleWest Communications plc,
SBC International, Inc., Cox Communications, Inc. and SBC Cable
Comms (UK) relating to the TeleWest Merger. (Incorporated by
reference to Exhibit 10.1 on Form 10-Q of Cox Communications,
Inc., filed with the Commission on November 8, 1995.)
10.17 -- Form of Co-Operation Agreement among Cox U.K. Communications, LP,
Cox Communications, Inc., Southwestern Bell International Holdings
(UK-1) Corporation and Southwestern Bell International Holdings
(UK-2) Corporation, SBC International, Inc. and TeleWest plc
relating to the TeleWest Merger. (Incorporated by reference to
Exhibit 10.2 on Form 10-Q of Cox Communications, Inc., filed with
the Commission on November 8, 1995.)
10.18 -- Form of Share Dealing Agreement among Cox Communications, Inc.,
Cox U.K. Communications, LP, SBC International, Inc., Southwestern
Bell International Holdings (UK-1) Corporation and Southwestern
Bell International Holdings (UK-2) Corporation, Telecommunications
International Holdings, Inc., US West International Holdings, Inc.
and TeleWest plc relating to the TeleWest Merger. (Incorporated by
reference to Exhibit 10.3 on Form 10-Q of Cox Communications,
Inc., filed with the Commission on November 8, 1995.)
10.19 -- Asset Exchange Agreement, dated December 31, 1996, by and among
Heritage Cablevision of Southeast Massachusetts, Inc., Heritage
Cablevue, Inc., TCI Cablevision of St. Bernard, Inc., TCI of
Council Bluffs, Inc., TCI of Virginia, Inc., UA-Columbia
Cablevision of Massachusetts, Inc., United Cable Television of
Sarpy County, Inc., United Cable Television of Scottsdale, Inc.,
and TCI American Cable Holdings, L.P., and CoxCom, Inc.*
10.20 -- Subscription Agreement, dated March 21, 1997, between Cox
Communications, Inc. and Flextech plc
13 -- Portions of the 1996 Annual Report to Stockholders (expressly
incorporated by reference in Part I, Item 3 and Part II, Items 5
through 8 of this Report).
21 -- Subsidiaries of Cox Communications, Inc.
23.1 -- Consent of Deloitte & Touche LLP, Atlanta, Georgia
23.2 -- Consent of Deloitte & Touche LLP, Kansas City, Missouri
23.3 -- Consent of Deloitte & Touche LLP, New York, New York
23.4 -- Consent of Deloitte & Touche LLP, Costa Mesa, California
23.5 -- Consent of Price Waterhouse LLP, Washington, District of Columbia
24 -- Power of Attorney (included on page 42)
27 -- Financial data schedule
99.1 -- Combined financial statements of Cox Communications PCS, L.P.
and Cox California PCS, Inc.
99.2 -- Financial statements of Sprint Spectrum Holding Company, L.P.
99.3 -- Financial statements of Teleport Communications Group Inc.
________
* Schedules and exhibits intentionally omitted.
(b) Current reports on Form 8-K:
Cox filed a Current Report on Form 8-K dated 12/31/96.
41
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, COX COMMUNICATIONS, INC. HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
COX COMMUNICATIONS, INC.
By: /s/ JAMES O. ROBBINS
----------------------
James O. Robbins
President and Chief Executive Officer
Date: March 28, 1997
POWER OF ATTORNEY
Cox Communications, Inc., a Delaware corporation, and each person whose
signature appears below, constitutes and appoints James O. Robbins and Jimmy W.
Hayes, and either of them, with full power to act without the other, such
person's true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Annual Report on Form 10-K and any and all amendments
to such Annual Report on Form 10-K and other documents in connection therewith,
and to file the same, and all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
each and every act and thing necessary or desirable to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorneys-in-fact, or any
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF COX
COMMUNICATIONS, INC. AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES C. KENNEDY Chairman of the Board of March 28, 1997
- ------------------------- Directors
James C. Kennedy
/s/ JAMES O. ROBBINS President and Chief Executive March 28, 1997
- ------------------------- Officer; Director
James O. Robbins
/s/ JIMMY W. HAYES Senior Vice President, Finance and March 28, 1997
- ------------------------- Chief Financial Officer
Jimmy W. Hayes (principal financial officer)
/s/ MICHAEL D. HORAN Vice President and Controller March 28, 1997
- ------------------------- (principal accounting officer)
Michael D. Horan
/s/ JANET MORRISON CLARKE Director March 28, 1997
- -------------------------
Janet Morrison Clarke
42
<PAGE>
/s/ JOHN R. DILLON Director March 28, 1997
- -------------------------
John R. Dillon
/s/ DAVID E. EASTERLY Director March 28, 1997
- -------------------------
David E. Easterly
/s/ ROBERT F. ERBURU Director March 28, 1997
- -------------------------
Robert F. Erburu
/s/ ANDREW J. YOUNG Director March 28, 1997
- -------------------------
Andrew J. Young
43
<PAGE>
EXHIBIT 10.19
================================================================================
ASSET EXCHANGE AGREEMENT
BY AND AMONG
HERITAGE CABLEVISION OF SOUTH EAST MASSACHUSETTS, INC.
HERITAGE CABLEVUE, INC., TCI CABLEVISION OF ST. BERNARD, INC.,
TCI OF COUNCIL BLUFFS, INC., TCI OF VIRGINIA, INC.,
UA-COLUMBIA CABLEVISION OF MASSACHUSETTS, INC.,
UNITED CABLE TELEVISION OF SARPY COUNTY, INC.,
UNITED CABLE TELEVISION OF SCOTTSDALE, INC.,
AND
TCI AMERICAN CABLE HOLDINGS, L.P.,
AND
COXCOM, INC.
DATED
DECEMBER 31, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION> Page
----
<S> <C> <C>
1. Definitions...................................................................................... 1
1.1. Additional System Agreement............................................................... 2
1.2. Additional System Closing Date............................................................ 2
1.3. Affiliate................................................................................. 2
1.4. Annualized Cash Flow...................................................................... 2
1.5. Assets.................................................................................... 2
1.6. Basic Cable Service....................................................................... 2
1.7. Business Day.............................................................................. 2
1.8. Cable Act................................................................................. 2
1.9. Closing................................................................................... 2
1.10. Communications Act........................................................................ 3
1.11. Compensation Arrangement.................................................................. 3
1.12. Contracts................................................................................. 3
1.13. Contribution.............................................................................. 3
1.14. Cox....................................................................................... 3
1.15. CPST or Cable Programming Services Tier................................................... 3
1.16. Employee Plan............................................................................. 3
1.17. Encumbrance............................................................................... 4
1.18. Environmental Law......................................................................... 4
1.19. Equivalent Billing Unit................................................................... 4
1.20. ERISA..................................................................................... 5
1.21. FAA....................................................................................... 5
1.22. FCC....................................................................................... 5
1.23. Franchises................................................................................ 5
1.24. GAAP...................................................................................... 5
1.25. Governmental Authority.................................................................... 5
1.26. Governmental Permits...................................................................... 5
1.27. Hazardous Substances...................................................................... 5
1.28. HSR Act................................................................................... 6
1.29. Intangibles............................................................................... 6
1.30. Legal Requirement......................................................................... 6
1.31. Material Adverse Effect................................................................... 6
1.32. Multiemployer Plan........................................................................ 6
1.33. Permitted Encumbrances.................................................................... 6
1.34. Person.................................................................................... 7
1.35. Quad Cities Rebuild....................................................................... 7
1.36. Quarterly Cash Flow....................................................................... 7
1.37. Real Property............................................................................. 7
1.38. Required Consents......................................................................... 7
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
1.39. Service Areas............................................................................. 7
1.40. System or Systems......................................................................... 8
1.41. System Material Adverse Effect............................................................ 8
1.42. Tangible Personal Property................................................................ 8
1.43. TCI....................................................................................... 8
1.44. Other Definitions......................................................................... 8
2. Exchange of Assets............................................................................... 9
2.1. Exchange.................................................................................. 9
2.2. Inclusion of Assets....................................................................... 9
2.3. Value of Exchanged Assets................................................................. 9
3. Additional Consideration......................................................................... 10
3.1. Valuation Differential.................................................................... 10
3.2. Adjustments to Cash Consideration......................................................... 10
3.3. Determination of Adjustments to Cash Consideration........................................ 12
3.4. Additional System Adjustments............................................................. 13
4. Assumed Liabilities and Excluded Assets.......................................................... 14
4.1. Assignment and Assumption................................................................. 14
4.2. Excluded Assets........................................................................... 14
5. Representations and Warranties of TCI Subsidiaries and TCI, L.P.................................. 16
5.1. Organization, Standing and Authority...................................................... 16
5.2. Authorization and Binding Obligation...................................................... 16
5.3. No Consents; Absence of Conflicting Agreements............................................ 17
5.4. Governmental Permits...................................................................... 17
5.5. Real Property............................................................................. 18
5.6. Tangible Personal Property................................................................ 19
5.7. Contracts................................................................................. 19
5.8. Complete System........................................................................... 20
5.9. Trademarks, Trade Names and Copyrights.................................................... 20
5.10. Information on TCI Systems................................................................ 21
5.11. Financial Statements...................................................................... 22
5.12. Employee Benefit Plans.................................................................... 22
5.13. Labor Relations........................................................................... 23
5.14. Tax Returns; Other Reports................................................................ 23
5.15. Claims and Legal Actions.................................................................. 24
5.16. Environmental Matters..................................................................... 24
5.17. Compliance with Laws...................................................................... 25
5.18. Conduct of Business in Ordinary Course.................................................... 25
5.19. FCC and Copyright Compliance.............................................................. 25
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
5.20. Accounts Receivable....................................................................... 27
5.21. Competitive Activity...................................................................... 27
5.22. Cure...................................................................................... 27
6. Representations and Warranties of Cox............................................................ 27
6.1. Organization, Standing and Authority...................................................... 27
6.2. Authorization and Binding Obligation...................................................... 28
6.3. No Consents; Absence of Conflicting Agreements............................................ 28
6.4. Governmental Permits...................................................................... 29
6.5. Real Property............................................................................. 29
6.6. Tangible Personal Property................................................................ 30
6.7. Contracts................................................................................. 31
6.8. Complete System........................................................................... 31
6.9. Trademarks, Trade Names and Copyrights.................................................... 31
6.10. Information on Cox Systems................................................................ 32
6.11. Financial Statements...................................................................... 33
6.12. Employee Benefit Plans.................................................................... 33
6.13. Labor Relations........................................................................... 34
6.14. Tax Returns; Other Reports................................................................ 34
6.15. Claims and Legal Actions.................................................................. 35
6.16. Environmental Matters..................................................................... 35
6.17. Compliance with Laws...................................................................... 36
6.18. Conduct of Business in Ordinary Course.................................................... 36
6.19. FCC and Copyright Compliance.............................................................. 36
6.20. Accounts Receivable....................................................................... 38
6.21. Competitive Activity...................................................................... 38
6.22. Cure...................................................................................... 38
6.23. Additional System(s)...................................................................... 38
7. Pre-Closing Covenants............................................................................ 38
7.1. Access to Premises and Records............................................................ 38
7.2. Continuity and Maintenance of Operations.................................................. 39
7.3. Employee Benefit Matters.................................................................. 41
7.4. Broker's Fees............................................................................. 42
7.5. Required Consents and Estoppel Certificates............................................... 42
7.6. Title Commitments and Surveys............................................................. 44
7.7. Environmental Investigations.............................................................. 44
7.8. HSR Notification.......................................................................... 45
7.9. No Shop................................................................................... 46
7.10. Notification of Certain Matters........................................................... 46
7.11. Risk of Loss; Condemnation................................................................ 46
7.12. Lien and Judgment Searches................................................................ 47
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
7.13. Transfer Taxes, Fees and Expenses......................................................... 47
7.14. Noncompetition; Nonsolicitation........................................................... 47
7.15. Cooperation; Satisfaction of Conditions................................................... 47
7.16. Confidentiality........................................................................... 48
7.17. Publicity................................................................................. 48
7.18. Billing Services.......................................................................... 48
7.19. Delivery of Financial Information......................................................... 49
7.20. Capital Expenditures...................................................................... 49
7.21. Franchise Renewals........................................................................ 49
7.22. Use of Transferor's Name.................................................................. 49
7.23. Completion of the Contribution............................................................ 50
7.24. Certain Post-Closing Covenants............................................................ 50
7.25. Updated Schedules......................................................................... 50
7.26. Leased Vehicles........................................................................... 50
7.27. DCR/DMX................................................................................... 50
7.28. Additional System(s)...................................................................... 51
7.29. Interim Financial Statements.............................................................. 51
7.30. Iowa Microwave Interconnect............................................................... 51
8. Closing.......................................................................................... 52
9. Conditions to Closing............................................................................ 52
9.1. Conditions to the Obligations of Transferee and Transferor................................ 52
9.2. Conditions to the Obligations of Transferee............................................... 52
9.3. Conditions to Obligations of Transferor................................................... 55
9.4. Waiver of Conditions...................................................................... 55
10. Primary and Secondary Transfers.................................................................. 55
10.1. Primary Transfer.......................................................................... 55
10.2. Subsequent Transfers...................................................................... 56
10.3. Management Agreements..................................................................... 56
10.4. Construction.............................................................................. 56
10.5. Cash Consideration........................................................................ 56
10.6. Termination of Management Agreement or Revocation of Retained Franchise................... 57
11. Termination...................................................................................... 57
11.1. Events of Termination..................................................................... 57
11.2. Liabilities in Event of Termination....................................................... 57
11.3. Procedure Upon Termination................................................................ 57
12. Survival; Indemnification........................................................................ 57
12.1. Survival of Representations and Warranties................................................ 57
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
12.2. Indemnification by Transferor............................................................. 58
12.3. Indemnification by Transferee............................................................. 59
12.4. Procedure for Indemnification............................................................. 59
12.5. Limitations on Liability.................................................................. 60
12.6. Special Indemnification relating to the Additional System(s).............................. 61
12.7. Release of TCI Subsidiaries............................................................... 61
13. Miscellaneous.................................................................................... 61
13.1. Parties Obligated and Benefitted.......................................................... 61
13.2. Notices................................................................................... 61
13.3. Right to Specific Performance; Remedies................................................... 62
13.4. Waiver.................................................................................... 63
13.5. Captions.................................................................................. 63
13.6. Choice of Law............................................................................. 63
13.7. Terms..................................................................................... 63
13.8. Rights Cumulative......................................................................... 63
13.9. Further Actions........................................................................... 63
13.10. Time of the Essence....................................................................... 63
13.11. Late Payments............................................................................. 63
13.12. Counterparts.............................................................................. 64
13.13. Entire Agreement.......................................................................... 64
13.14. Severability.............................................................................. 64
13.15. Construction.............................................................................. 64
</TABLE>
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
EXHIBITS
- --------
A List of TCI Systems and Franchises Related to the TCI Systems
B List of Cox Systems and Franchises Related to the Cox Systems
C Excluded Assets
D Form of Noncompetition and Nonsolicitation Agreement
E Form of Opinion of TCI's General Counsel
F Form of Opinion of Counsel for Cox
G Form of Assumption Agreement
H Form of Management Agreement
SCHEDULES
- ---------
1.17 Combined Basic Cable Service and CPST Rates for EBU Calculation
1.31A TCI Contested Taxes and Assessments
1.31B Cox Contested Taxes and Assessments
3.2.6 Capital Expenditures
3.2.7 Equivalent Billing Unit Information for Closing Adjustments
5.1 TCI Incorporation and Joint Ventures
5.3 TCI Required Consents
5.4 TCI Governmental Permits
5.5 TCI Real Property
5.6 TCI Tangible Personal Property
5.7 TCI Contracts
5.9 TCI Trademarks, Trade Names and Copyrights
5.10.1 TCI System Information
5.10.3 TCI Rate Information
5.10.4 TCI Channel Line-up Information
5.10.5 TCI Access Issues
5.10.6 TCI Bonds, Surety Instruments and Letters of Credit
5.10.7 TCI MDS, MMDS or SMATV Operations
5.11 TCI Financial Statements
5.12 TCI Employee Benefit Plans
5.13 TCI Employees
5.14 TCI Tax Matters
5.15 TCI Litigation
5.16 TCI Environmental Matters
5.17 TCI Notice of Noncompliance
5.18 TCI Exceptions to Conduct of Business in Ordinary Course
5.19 TCI FCC Compliance
5.21 TCI Competition
<PAGE>
6.1 Cox Incorporation and Joint Ventures
6.3 Cox Required Consents
6.4 Cox Governmental Permits
6.5 Cox Real Property
6.6 Cox Tangible Personal Property
6.7 Cox Contracts
6.9 Cox Trademarks, Trade Names and Copyrights
6.10.1 Cox System Information
6.10.3 Cox Rate Information
6.10.4 Cox Channel Line-up Information
6.10.5 Cox Access Issues
6.10.6 Cox Bonds, Surety Instruments and Letters of Credit
6.10.7 Cox MDS, MMDS or SMATV Operations
6.11 Cox Financial Statements
6.12 Cox Employee Benefit Plans
6.13 Cox Employees
6.14 Cox Tax Matters
6.15 Cox Litigation
6.16 Cox Environmental Matters
6.17 Cox Notice of Noncompliance
6.18 Cox Exceptions to Conduct of Business in Ordinary Course
6.19 Cox FCC Compliance
6.21 Cox Competition
7.2A TCI Exceptions to Operations in Ordinary Course
7.2B Cox Exceptions to Operations in Ordinary Course
9.2.6 Aggregate Minimum Number of Equivalent Billing Units
<PAGE>
ASSET EXCHANGE AGREEMENT
------------------------
This Asset Exchange Agreement (this "Agreement") is dated this 31st day of
December, 1996, by and among Heritage Cablevision of South East Massachusetts,
Inc., a Massachusetts corporation, Heritage Cablevue, Inc., a Delaware
corporation, TCI Cablevision of St. Bernard, Inc., a Louisiana corporation, TCI
of Council Bluffs, Inc., an Iowa corporation, TCI of Virginia, Inc., a Virginia
corporation, UA-Columbia Cablevision of Massachusetts, Inc., a Massachusetts
corporation, United Cable Television of Sarpy County, Inc., a Nebraska
corporation, United Cable Television of Scottsdale, Inc., an Arizona
corporation, (each individually a "TCI Subsidiary" and collectively, the "TCI
Subsidiaries") and TCI American Cable Holdings, L.P., a Colorado Limited
Partnership ("TCI, L.P."), and CoxCom, Inc., a Delaware corporation.
Capitalized terms used herein shall have the meaning set forth in Section 1
below or as otherwise defined herein.
RECITALS
--------
A. The TCI Subsidiaries listed on Exhibit A own and operate the cable
---------
television systems (the "TCI Systems") listed on Exhibit A, providing cable
---------
television service to customers pursuant to the Franchises (as defined below)
listed opposite each such system on Exhibit A.
---------
B. Cox owns and operates cable television systems (the "Cox Systems")
listed on Exhibit B, each providing cable television service to customers
---------
pursuant to the Franchises (as defined below) listed opposite each such system
on Exhibit B.
---------
C. Prior to Closing, the TCI Subsidiaries will contribute the TCI Assets
to TCI, L.P..
D. TCI, L.P., and Cox desire to exchange on the Closing Date the assets
of the TCI Systems and the assets of the Cox Systems in a transaction intended
to qualify as a tax-free exchange of like-kind assets pursuant to Section 1031
of the Internal Revenue Code of 1986, as amended (the "Code"), on the terms and
conditions set forth herein.
AGREEMENT
---------
In consideration of the above recitals and the mutual agreements stated in
this Agreement, the parties agree as follows:
1. Definitions. All defined terms in this Agreement apply equally to
-----------
both the TCI Subsidiaries and Cox. When it is the parties' intent to limit the
scope of any defined term solely to one party, such intent is indicated by
referring specifically to one party or the other (and in such instances "TCI
Subsidiaries" may be shortened to "TCI"), e.g., "TCI Service Area" or "Cox
- -
Assets." The term "Transferor" shall refer equally to TCI, L.P., and Cox insofar
as the term refers to such party in its capacity of transferring assets to the
other party. The term "Transferee" shall refer equally to TCI, L.P. and Cox
insofar as the term refers to such party in its capacity of receiving assets
from the other party. Wherever practicable and appropriate, all disclosures on
Exhibits and Schedules contemplated by this Agreement shall be specified on a
System by System basis.
<PAGE>
1.1. Additional System Agreement. The asset purchase agreement
---------------------------
pursuant to which the Additional System(s) is purchased.
1.2. Additional System Closing Date. The closing date of the purchase
------------------------------
of the Additional System(s) pursuant to the Additional System Agreement.
1.3. Affiliate. With respect to any Person, any other Person
---------
controlling, controlled by or under common control with such Person, with
"control" for such purpose meaning the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities or voting interests,
by contract or otherwise.
1.4. Annualized Cash Flow. The Quarterly Cash Flow for the calendar
--------------------
quarter immediately preceding the date of delivery of the Cash Flow Certificate,
multiplied by four.
1.5. Assets. All properties, privileges, rights, interests and
------
claims, real and personal, tangible and intangible, of every type and
description that are owned, leased, held or used principally in the cable
television business activities conducted by the TCI Subsidiaries or Cox, as
applicable through the Systems in and around the Service Areas, in which the TCI
Subsidiaries or Cox as applicable, have any right, title or interest or in which
they acquire any right, title or interest on or before the Closing Date,
including Real Property, Tangible Personal Property, Governmental Permits,
Contracts, Intangibles and accounts receivable, but excluding any Excluded
Assets. Notwithstanding the foregoing, if the Additional System is acquired on
or prior to the Closing Date or, if the Additional System is identified within
45 days after the Closing Date and the Additional System Closing Date occurs on
or before the Outside Additional System Closing Date, then the Additional System
shall be deemed to be a Cox System and the assets of such Additional System
shall be "Cox Assets," subject to the express limitations contained herein.
1.6. Basic Cable Service. The tier of cable television service which
-------------------
includes the retransmission of local broadcast signals as defined by the Cable
Act.
1.7. Business Day. Any day other than Saturday, Sunday or a day on
------------
which banking institutions in New York, New York or Denver, Colorado are
required or authorized to be closed.
1.8. Cable Act. The Cable Communications Policy Act of 1984 as
---------
amended by the Cable Television Consumer Protection and Competition Act of 1992,
as may be further amended, and the rules and regulations thereunder, as in
effect from time to time.
1.9. Closing. The consummation of the transactions contemplated by
-------
this Agreement, as described in Section 8, the date of which is referred to as
the "Closing Date."
1.10. Communications Act. The Communications Act of 1934, as amended,
------------------
and the rules and regulations thereunder, as in effect from time to time.
2
<PAGE>
1.11. Compensation Arrangement. Any plan or compensation arrangement
------------------------
other than an Employee Plan or a Multiemployer Plan, whether written or
unwritten, which provides to employees of any of the TCI Subsidiaries or of Cox,
as applicable, or any entity related thereto (under the terms of Sections
414(b), (c), (m) or (o) of the Code) any compensation or other benefits, whether
deferred or not, in excess of base salary or wages and excluding overtime pay,
including, but not limited to, any bonus (including any bonus given to motivate
employees to work for any of TCI Subsidiaries or of Cox, as applicable, through
Closing), incentive plan, stock rights plan, deferred compensation arrangement,
stock purchase plan, severance pay plan and any other perquisites and employee
fringe benefit plan.
1.12. Contracts. All pole attachment and conduit agreements, personal
---------
property leases, wire-crossing agreements, subscriber agreements (including
multi-dwelling unit and commercial agreements), maintenance agreements,
retransmission consent agreements and other agreements, written or oral
(including any amendments and other modifications thereto) to which any of the
TCI Subsidiaries or Cox, as applicable, is a party and that relate to the Assets
or the business and operations of the Systems (other than the Governmental
Permits, programming agreements, agreements constituting Real Property and any
contracts listed on Exhibit C), and that are (i) in effect on the date hereof or
(ii) entered into by the TCI Subsidiaries or Cox, as applicable, in the ordinary
course of business and as permitted by this Agreement between the date hereof
and the Closing Date.
1.13. Contribution. The contribution by the TCI Subsidiaries of the
------------
TCI Assets to TCI, L.P.
1.14. Cox. CoxCom, Inc. and those corporations to whom it is the
---
successor in interest by merger.
1.15. CPST or Cable Programming Services Tier. The tier of cable
---------------------------------------
television service immediately above Basic Cable Service offered by a System
providing for a package of programming that includes satellite-delivered
services.
1.16. Employee Plan. Any pension, retirement, profit-sharing, deferred
-------------
compensation, vacation, severance, bonus, incentive, medical, vision, dental,
disability, life insurance or any other employee benefit plan as defined in
Section 3(3) of ERISA (other than a Multiemployer Plan) to which any of the TCI
Subsidiaries or Cox, as applicable, or any entity related thereto (under the
terms of Sections 414(b), (c), (m) or (o) of the Code) contributes or which any
of the TCI Subsidiaries or Cox, as applicable, or any entity related thereto
(under the terms of Sections 414(b), (c), (m) or (o) of the Code) sponsors or
maintains or by which Transferor or any such entity related to Transferor is
otherwise bound.
1.17. Encumbrance. Any mortgage, lien, security interest, security
-----------
agreement, conditional sale or other title retention agreement, limitation,
pledge, option, charge, assessment, restrictive agreement, restriction,
encumbrance, adverse interest, restriction on transfer or any exception to or
defect in title or other ownership interest (including reservations, rights of
way,
3
<PAGE>
possibilities of reverter, encroachments, easements, rights of entry,
restrictive covenants, leases and licenses).
1.18. Environmental Law. Any Legal Requirement pertaining to land use,
-----------------
air, soil, surface water, groundwater (including protection, cleanup, removal,
remediation or damage thereof), public or employee health or safety or any other
environmental matter, including, without limitation, the following laws as the
same may be amended from time to time: (i) Clean Air Act (42 U.S.C. (S) 7401,
et seq.), (ii) Clean Water Act (33 U.S.C. (S) 1251, et seq.), (iii) Resource
- -- --- -- ---
Conservation and Recovery Act (42 U.S.C. (S) 6901, et seq.), (iv) Comprehensive
-- ---
Environmental Response Compensation Liability Act, as amended (42 U.S.C. (S)
9601, et seq.) ("CERCLA"), (v) Safe Drinking Water Act (42 U.S.C. (S) 300f, et
-- --- --
seq.), (vi) Toxic Substance Control Act (15 U.S.C. (S) 2601, et seq.), (vii)
- --- -- ---
Rivers and Harbors Act (33 U.S.C. (S) 401, et seq.), (viii) Endangered Species
-- ---
Act (16 U.S.C. (S) 1531, et seq.), and (ix) Occupational Safety and Health Act
-- ---
(29 U.S.C. (S) 651, et seq.), together with any other applicable federal, state
-- ---
or local laws relating to emissions, discharges, releases or threatened releases
of any Hazardous Substance into ambient air, land, surface water, ground water,
personal property or structures, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport,
discharge or handling of any Hazardous Substance.
1.19. Equivalent Billing Unit. An active customer for Basic Cable
-----------------------
Service either in a single household, a commercial establishment or in a multi-
unit dwelling (including a hotel unit); provided, however, that the number of
customers in a multi-unit dwelling or commercial establishment that obtain
service on a "bulk-rate" basis shall be determined on a System by System basis
by dividing the gross bulk-rate billings for both (i) Basic Cable Service and
(ii) CPST (but not billings from a la carte tiers or premium services,
installation or other non-recurring charges, converter rental, new product tier
or from any outlet or connection other than such customer's first or from any
pass-through charge for sales taxes, line-itemized franchise fees, fees charged
by the FCC and the like) attributable to such multi-unit dwelling or commercial
establishment during the most recent billing period ended prior to the date of
calculation (but excluding billings in excess of a single month's charge) by the
retail rate charged during that billing period to individual households for
combined Basic Cable Service and CPST offered by a System, such rate as of the
date of this Agreement being the rate for such System set forth on SCHEDULE 1.17
(excluding a la carte tiers or premium services, installation or other non-
recurring charges, converter rental, new product tier or from any outlet or
connection other than the first or from any pass-through charges for sales
taxes, line-itemized franchise fees, fees charged by the FCC and the like). For
purposes of this definition, an "active customer" shall mean any person,
commercial establishment or multi-unit dwelling at any given time that is
paying for and receiving Basic Cable Service from the System who has an account
that is not more than 60 days past due (except for past due amounts of $5 or
less, provided such account is otherwise current). For purposes of this
definition, an "active customer" does not include any person, commercial
establishment or multi-unit dwelling that as of the date of calculation has not
paid in full the charges for at least one month of the services ordered. For
purposes of this definition, the number of days past due of a customer account
shall be determined from the first day of the period for which the applicable
billing relates.
4
<PAGE>
1.20. ERISA. The Employee Retirement Income Security Act of 1974, as
-----
amended, and the rules and regulations thereunder, as in effect from time to
time.
1.21. FAA. The Federal Aviation Administration.
---
1.22. FCC. The Federal Communications Commission.
---
1.23. Franchises. All franchise agreements, franchise applications,
----------
operating permits and similar governing agreements, instruments, resolutions,
statutes, ordinances, approvals, authorizations, and similar rights obtained
from any Governmental Authority which are necessary or required in order to
operate the TCI Systems or the Cox Systems, as applicable, and provide cable
television services thereto, including all amendments thereto and renewals or
modifications thereof, as listed on SCHEDULE 5.4 (TCI SYSTEMS) and SCHEDULE 6.4
(COX SYSTEMS).
1.24. GAAP. Generally accepted accounting principles as in effect from
----
time to time in the United States of America.
1.25. Governmental Authority. (i) The United States of America, (ii)
----------------------
any state, commonwealth, territory or possession of the United States of America
and any political subdivision thereof (including counties, municipalities and
the like) or (iii) any agency, authority or instrumentality of any of the
foregoing, including any court, tribunal, department, bureau, commission or
board.
1.26. Governmental Permits. All Franchises and all other approvals,
--------------------
authorizations, permits, licenses (including without limitation domestic
satellite earth station and business radio), registrations, qualifications,
leases, variances and similar rights obtained from any Governmental Authority
authorizing, permitting or governing the provision of cable television services
or otherwise required for the ownership of the TCI Systems or the Cox Systems,
as applicable, as described on SCHEDULE 5.4 (TCI SYSTEMS) or SCHEDULE 6.4 (COX
SYSTEMS) but excluding any Excluded Assets.
1.27. Hazardous Substances. Any pollutant, contaminant, hazardous or
--------------------
toxic substance, material, constituent or waste or any pollutant that is labeled
or regulated as such terms are defined in any Environmental Law or that is
labeled or regulated as such by any Governmental Authority including, without
limitation, asbestos and asbestos-containing materials and any material or
substance that is: (i) designated as a "hazardous substance" pursuant to
Section 307 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1251,
et seq. (33 U.S.C. (S) 1317), (ii) defined as a "hazardous waste" pursuant to
- -- ---
Section 1004 of the Federal Solid Waste Disposal Act, 42 U.S.C. Section 6901, et
--
seq. (42 U.S.C. (S) 6903), (iii) defined as a "hazardous substance" pursuant to
- ---
Section 101 of CERCLA or (iv) is so designated or defined under any other
applicable Legal Requirements.
1.28. HSR Act. The Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976, as amended, and the rules and regulations thereunder, as in effect from
time to time.
5
<PAGE>
1.29. Intangibles. All intangible assets owned, used primarily, or
-----------
held for use primarily in the business or operations of the Systems, including
trade secrets, proprietary information and technical information and data,
however embodied (e.g., in the form of subscriber lists, records, customer polls
and surveys, maps, computer disks and tapes, plans, diagrams, blue prints and
schematics, or contained in filings with the Governmental Authorities and the
FCC relating to the System, or in books and records relating to the business or
operations of the Systems (subject to Section 4.2.3)), rights or claims under
Tangible Personal Property warranties, copyrights and going concern value, if
any, but excluding any Excluded Assets.
1.30. Legal Requirement. Any statute, ordinance, code, law, rule,
-----------------
regulation, order or other requirement, standard or procedure enacted, adopted
or applied by any Governmental Authority, including judicial decisions applying
common law or interpreting any other Legal Requirement.
1.31. Material Adverse Effect. A material adverse effect on the
-----------------------
aggregate operations, assets or financial condition of the TCI Systems or the
Cox Systems, as applicable, taken as a whole, other than matters affecting the
cable television industry generally (including without limitation legislative,
regulatory or litigation matters) and matters relating to or arising from
national economic conditions (including financial and capital markets).
1.32. Multiemployer Plan. A plan, as defined in ERISA Sections 3(37)
------------------
or 4001(a)(3), to which the TCI Subsidiaries or Cox, as applicable, or any trade
or business which would be considered a single employer with them under Section
4001(b)(1) of ERISA contributed, contributes or is required to contribute.
1.33. Permitted Encumbrances. The following Encumbrances: (i)
----------------------
statutory landlord's liens and liens for current taxes, assessments and
governmental charges not yet due and payable (or being contested in good faith
all of which are listed in SCHEDULES 1.31A (TCI) and 1.31B (Cox)), (ii) zoning
laws and ordinances and similar Legal Requirements, (iii) statutory liens or
other encumbrances that are minor or technical defects in title that
individually or in the aggregate do not materially affect the value,
marketability or utility of a given Asset as presently utilized, (iv) such
liens, liabilities or encumbrances as are Assumed Liabilities; (v) leased
interests and mortgagee interests in property owned by others and leased
interests in property leased to others; (vi) rights reserved to any Governmental
Authority to regulate the affected property and (vii) as to interests in Real
Property, any easements, rights-of-way, servitudes, permits, restrictions and
minor imperfections or irregularities in title which are reflected in the public
records and which do not individually or in the aggregate with respect to a
given parcel of Real Property, materially interfere with the right or ability to
own, use or operate the Real Property as presently utilized or to convey good
and marketable title in fee simple to such Real Property, provided that
"Permitted Encumbrances" will not include any Encumbrance which could prevent or
inhibit in any material way the conduct of the business of the affected System,
and provided further that classification of any Encumbrance as a Permitted
Encumbrance under (i) above will not affect any responsibility Transferor may
have for such Encumbrance, including pursuant to the adjustment and proration
provisions of Article 3 and the indemnification provisions of Article 12.
6
<PAGE>
1.34. Person. Any natural person, corporation, partnership, trust,
------
unincorporated organization, association, limited liability company,
Governmental Authority or other entity.
1.35. Quad Cities Rebuild. The upgrade of the Quad Cities System to
-------------------
achieve (i) all miles of distribution plant upgraded, spaced and activated to a
capacity of 750 MHz, and (ii) capability for signals to be transmitted
downstream between 50 MHz and 750 MHz.
1.36. Quarterly Cash Flow. For any calendar quarter, the net earnings
-------------------
or net income attributable to the business of operating the Systems for such
quarter, determined in accordance with GAAP, without taking into account any
interest income or any nonrecurring items of income, gain or expense and before
deduction of any amount on account of corporate overhead allocations, interest,
income taxes, depreciation, amortization or other noncash charges, it being
agreed that Quarterly Cash Flow shall be calculated in a manner consistent with
that used by the party for whom the determination is made in the preparation of
such party's Financial Statements.
1.37. Real Property. All assets consisting of realty, including
-------------
appurtenances, improvements and fixtures located on such realty, and any other
interests in real property, including fee interests in offices and headend sites
as well as leasehold interests and easements, including without limitation those
described on SCHEDULE 5.5 (TCI Systems) or SCHEDULE 6.5 (Cox Systems), plus such
additions thereto and deletions therefrom arising in the ordinary course of
business and as permitted by this Agreement between the date hereof and the
Closing Date, but excluding any right-of-way, easement or access agreements
pursuant to which the TCI Subsidiaries or Cox, as applicable, have access to
multiple dwelling units or commercial establishments (all of which shall be
treated as Contracts for purposes of this Agreement) and any Excluded Assets.
1.38. Required Consents. All Franchises, licenses, authorizations,
-----------------
approvals and consents required under Governmental Permits, Contracts or
otherwise for (i) Transferor to transfer the Assets and the business and
operations of the Systems to Transferee, (ii) Transferee to conduct the business
and operations of the Systems and to own, lease, use and operate the Assets at
the places and in the manner in which the business or operations of the Systems
is conducted as of the date of this Agreement and on the Closing Date and (iii)
Transferee to assume and perform the Governmental Permits and Contracts in
accordance with the terms hereof.
1.39. Service Areas. When used in reference to TCI, the term "Service
-------------
Areas" shall mean the areas in which the TCI Subsidiaries operate their cable
television business in and around the areas described in the Franchises listed
on Exhibit A. When used in reference to Cox, the term "Service Areas" shall
---------
mean the areas in which Cox operates its cable television business in and around
the areas described in the Franchises listed on Exhibit B.
---------
1.40. System or Systems. When used in the singular, the term refers to
-----------------
a single TCI System or a single Cox System and when used in the plural, the term
refers to all of the TCI Systems or all of the Cox Systems.
7
<PAGE>
1.41. System Material Adverse Effect. A material adverse effect on the
------------------------------
operations, assets or financial condition of an individual System to which the
provision relates, other than matters affecting the cable television industry
generally (including without limitation legislative, regulatory or litigation
matters) and matters relating to or arising from national economic conditions
(including financial and capital markets).
1.42. Tangible Personal Property. All the machinery, equipment, tools,
--------------------------
vehicles, furniture, leasehold improvements, office equipment, plant, inventory,
spare parts, supplies and other tangible personal property which are owned or
leased by the TCI Subsidiaries or Cox, as applicable, and used primarily or held
primarily for use as of the date hereof in the conduct of the business and
operations of the Systems, plus such additions thereto and deletions therefrom
arising in the ordinary course of business and as permitted by this Agreement
between the date hereof and the Closing Date, but excluding any Excluded Assets.
1.43. TCI Collectively, TCI, L.P. and the TCI Subsidiaries.
---
1.44. Other Definitions. The following terms are defined in the
-----------------
Sections indicated:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Additional System Closing Date 3.4.2
Additional System Purchase Price 3.4.1
Additional System(s) 7.28.1
Antitrust Division 7.8
Assumed Liabilities 4.1
Cash Consideration 3.1
Cash Flow Certificate 7.24
CERCLA 1.12
Claimant 12.4.1
Closing Date 1.6
Code Recitals
Copyright Act 5.19.3
Cost of Service Election 5.19.2
Cox Easements 6.5
Cox Employees 6.13
Cox Financial Statements 6.11
Cox Related Agreements 6.2
Cox System Plans 6.12.1
Cox Systems Recitals
Escrow 3.4.2
Escrow Agent 3.4.2
Escrow Amount 3.4.2
Excluded Assets 4.2
Final Report 3.3.2
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
FTC 7.8
Indemnifying Party 12.4.1
Management Agreement 10.3
Noncompetition and
Nonsolicitation Agreement 7.14
Outside Additional System Closing Date 3.4.2
Preliminary Report 3.3.1
Primary Transfer 10.1
Prime Rate 13.11
Retained Assets 10.1
Retained Franchises 10.1
Subsequent Transfer 10.2
Survival Period 12.1
Taking 7.11.2
TCI Easements 5.5
TCI Employees 5.13
TCI Financial Statements 5.11
TCI Related Agreements 5.2
TCI Subsidiaries Recitals
TCI System Plans 5.12.1
TCI Systems Recitals
Transferee 1
Threshold Amount 12.5.1
Transferor 1
</TABLE>
2. Exchange of Assets.
------------------
2.1. Exchange. Subject to the terms and conditions set forth in this
--------
Agreement, TCI and Cox agree to cause to be exchanged simultaneously at Closing
the TCI Assets for the Cox Assets.
2.2. Inclusion of Assets. With the exception of the Excluded Assets,
-------------------
and except as otherwise specifically provided in this Agreement, all of the
Assets are intended to be transferred, assigned and conveyed to Transferee,
whether or not described in the Schedules.
2.3. Value of Exchanged Assets. As permitted by Section 1031 of the
-------------------------
Code and regulations promulgated thereunder, (i) the TCI Tangible Personal
Property shall be exchanged for the Cox Tangible Personal Property, (ii) the TCI
Real Property shall be exchanged for the Cox Real Property and (iii) the TCI
Governmental Permits, Contracts and other Intangibles shall be exchanged for the
Cox Governmental Permits, Contracts and other Intangibles. The parties shall
use their commercially reasonable efforts to determine and finalize the value of
the TCI Assets and the Cox Assets (including separate valuations of the
categories of assets included in the preceding sentence) not later than 90 days
after the Closing Date. Once such valuations are mutually agreed to, TCI and
Cox shall not take any position inconsistent with such valuation, will file all
returns and reports with
9
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respect to the transaction contemplated by this Agreement, including all
federal, state and local returns on a basis consistent with such valuations and
each promptly shall give to the other notice of any disallowance of or challenge
to such reporting by any taxing Governmental Authority.
3. Additional Consideration.
------------------------
3.1. Valuation Differential. In order to equalize the value of the
----------------------
transaction for both TCI and Cox, in addition to the exchange of the Assets of
the TCI Systems for the Assets of the Cox Systems as described in Section 2, at
Closing at TCI's option either (i) Cox shall pay to TCI by wire transfer, in
immediately available funds, $18,000,000, subject to adjustments as provided in
Sections 3.2 and 3.3 (the "Cash Consideration"), or (ii) Cox shall acquire the
Additional System(s) which shall be exchanged pursuant to Section 7.28 below.
3.2. Adjustments to Cash Consideration.
---------------------------------
3.2.1. Appropriate adjustments on a pro rata basis as of the
Closing Date will be made for all prepaid expenses other than inventory (but
only to the extent the full benefit thereof will be realizable by Transferee
within 12 months after the Closing Date), accrued vacation (only to the extent
Transferee honors such accrual as set forth in Section 7.3.4 below), accrued
expenses (including real and personal property taxes), prepaid income but
exclusive of any unearned revenues from the Home Shopping Network, all as
determined in accordance with GAAP consistently applied, and to reflect the
principle that all expenses and income attributable to the business and
operations of the Systems for the period prior to the Closing Date are for the
account of Transferor, and all expenses and income attributable to the business
and operations of the Systems for the period on and after the Closing Date are
for the account of Transferee.
3.2.2. All advance payments to, or funds of third parties on
deposit with, Transferor as of the Closing Date, relating to the business and
operations of the Systems, including advance payments by advertisers and advance
payments and deposits by customers served by the Systems for converters,
encoders, decoders, cable television service and related sales (including any
accrued interest on such customer deposits), will be retained by Transferor, and
Transferee shall receive a credit for assuming the obligations relating to such
advance payments and deposits in an amount equal to such obligations.
3.2.3. All deposits relating to the business and operations of
the Systems that are held by third parties as of the Closing Date for the
account of Transferor or as security for Transferor's performance of its
obligations, including deposits on leases and deposits for utilities, will be
credited to the account of Transferor in their full amounts and will become the
property of Transferee; provided that no adjustment will be made for any
deposits the full benefit of which for contractual or other reasons cannot be
made available to Transferee within 12 months following the Closing Date.
3.2.4. Transferor shall receive a credit for customer accounts
receivable assigned to Transferee at Closing as follows: (i) 100% of the face
amount of the customer accounts
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<PAGE>
receivable which are outstanding 60 days or less from the first day of the
period to which any outstanding bill for such account receivable relates, and
(ii) Transferor shall receive no credit for any customer accounts receivable (A)
any portion of which is 61 days or more past due from the first date of the
period to which any outstanding bill for such account receivable relates or (B)
from customers whose accounts are inactive or whose service is pending
disconnection for any reason as of the Closing Date.
3.2.5. Transferor shall receive a credit for advertising accounts
receivable assigned to Transferee at Closing as follows: (i) 100% of the face
amount of the advertising accounts receivable which are outstanding 90 days or
less from the invoice date, (ii) 80% of the face amount of all advertising
accounts receivable which are outstanding more than 90 but fewer than 121 days
from the invoice date. Transferor shall receive no credit for advertising
accounts receivable which are outstanding more than 120 days from the invoice
date. Notwithstanding the foregoing, Transferor shall receive a credit for
advertising accounts receivable assigned to Transferee at Closing of 100% of the
face amount of the advertising accounts receivable from national and regional
representation accounts and from Sprint, regardless of the age thereof.
3.2.6. Transferor shall receive a credit equal to the excess of the
aggregate amount of its capital expenditures expended in accordance with the
terms hereof for upgrading cable plant and converters and extending its cable
plant in Transferor's Systems during the period between January 1, 1996 and
Closing in excess of the amount budgeted for such purposes as described on
SCHEDULE 3.2.6, if Transferee requested such excess spending in writing pursuant
to Section 7.20 or such excess spending was otherwise permitted pursuant to
Section 7.20, and Transferee shall receive a credit equal to the amount by which
the aggregate amount of Transferor's capital expenditures utilized for upgrading
cable plant and converters and extending its cable plant in Transferor's System
during the same period is less than the amount budgeted for such purposes as
described on SCHEDULE 3.2.6.
3.2.7. Transferee shall receive a credit for an amount equal to the
aggregate "Per-EBU Value" indicated on SCHEDULE 3.2.7 with respect to
Transferor's Systems for each Equivalent Billing Unit less than the "Minimum
Number of EBUs" indicated on SCHEDULE 3.2.7 with respect to Transferor's
Systems, with the aggregate number of Equivalent Billing Units in Transferor's
Systems (calculated by taking the average of the Equivalent Billing Units for
the end of each of the thirteen months ending immediately prior to the Closing)
being estimated as of Closing in Transferor's certificate delivered to
Transferee in accordance with Section 9.2.12, and thereafter subject to post-
Closing verification and adjustment under Section 3.3.2.
3.2.8. The adjustments provided for in this Section 3.2 will be
made without duplication. In addition, none of the adjustments provided for in
this Section 3.2 will be made with respect to any Excluded Asset or with respect
to any item of income or expense related to an Excluded Asset or the Additional
System(s). The net amount of the adjustments, if any, provided for in this
Section 3.2 shall be treated as an adjustment to the Cash Consideration paid at
Closing.
11
<PAGE>
3.3. Determination of Adjustments to Cash Consideration. Preliminary
--------------------------------------------------
and final adjustments to the Cash Consideration will be determined as follows:
3.3.1. At least ten Business Days prior to the Closing,
Transferor will deliver to Transferee a report with respect to Transferor's
Systems (the "Preliminary Report"), certified as to completeness and accuracy by
Transferor, showing in detail the preliminary determination of the adjustments
referred to in Section 3.2, calculated in accordance with such Section as of the
Closing Date (or as of any other date(s) agreed to by the parties) together with
any documents substantiating the determination of the adjustments to the Cash
Consideration proposed in the Preliminary Report. The Preliminary Report will
include the number of subscribers for each of Transferor's Systems, a
calculation of the number of Equivalent Billing Units and a schedule setting
forth advance payments and deposits made to or by Transferor, as well as
accounts receivable information relating to the Systems (showing sums due and
their respective aging as of the Closing Date). The parties shall negotiate in
good faith to resolve any dispute and to reach an agreement prior to the Closing
Date on such estimated adjustments as of the Closing Date or thereafter in
accordance with Section 3.3.2 and 3.3.3 below. The net adjustment shown in the
Preliminary Reports, as adjusted by agreement of the parties will be reflected
as an adjustment to the Cash Consideration payable at the Closing.
3.3.2. Within 90 days after the Closing, Transferor will deliver
to Transferee a report with respect to Transferor's Systems (the "Final
Report"), similarly certified by Transferor, showing in detail the final
determination of any adjustments which were not calculated as of the Closing
Date and containing any corrections to the Preliminary Report, together with any
documents substantiating the final calculation of the adjustments proposed in
the Final Report. Transferee will provide Transferor with reasonable access to
all records which Transferee has in its possession and which are necessary for
Transferor to prepare the Final Report.
3.3.3. Within 30 days after receipt of the Final Report,
Transferee will give Transferor written notice of Transferee's objections, if
any, to the other's Final Report. If there are no objections to the Final
Reports, the net amount of any adjustments to the Cash Consideration paid at
Closing reflected in the Final Reports shall be promptly paid by the appropriate
party. If there are objections to either Final Report, the parties shall use
good faith efforts to jointly resolve the objections within 30 days of
Transferor's receipt of Transferee's written notice of objections, which
resolution, if achieved, shall be binding upon both parties to this Agreement
and not subject to dispute or review. If the parties cannot resolve the
discrepancies to their mutual satisfaction within such 30-day period, the
parties shall, within the following 10 days, jointly designate a national
independent public accounting firm to be retained to review the Final Reports
together with the notice(s) of objections and any other relevant documents. The
parties agree that the foregoing independent public accounting firm shall not be
one that is regularly engaged by either party. The cost of retaining such
independent public accounting firm shall be borne equally by the parties. Such
firm shall report its conclusions as to adjustments pursuant to this Section 3.3
which shall be conclusive on all parties to this Agreement and not be subject to
dispute or review. If, after resolution of the Final Reports, an additional
adjustment to the Cash Consideration is appropriate with respect to the amount
of the adjustments paid or credited at the Closing, the appropriate party shall
promptly pay such amount.
12
<PAGE>
3.4. Additional System Adjustments.
-----------------------------
3.4.1. If the Additional System is acquired by Cox on or prior to
the Closing Date and (i) the Additional System Purchase Price is greater than
the Cash Consideration (A) Cox shall pay to the seller of the Additional System,
the Cash Consideration and (B) TCI shall pay to the seller of the Additional
System the difference between (a) the Additional System Purchase Price and (b)
the Cash Consideration or (ii) the Additional System Purchase Price is less than
the Cash Consideration (Y) Cox shall pay to the seller of the Additional System,
the Additional System Purchase Price, and (Z) Cox shall pay to TCI an amount
equal to (a) the Cash Consideration less (b) the Additional System Purchase
Price. The "Additional System Purchase Price" means the purchase price paid by
Cox to acquire the Additional System, after taking into account preliminary
closing purchase price adjustments under the Additional System Agreement. Such
payments shall be made by wire transfer of immediately available funds.
3.4.2. If the Additional System is not acquired by Cox on or prior
to the Closing Date, on the Closing Date Cox shall deposit by wire transfer of
immediately available funds, the Cash Consideration (the "Escrow Amount") into
an escrow account with an escrow agent chosen by TCI (the "Escrow Agent")
pursuant to a mutually agreed upon form of escrow agreement (the "Escrow"). If
TCI does not identify and designate an Additional System within 45 days after
the Closing Date, Cox shall direct the Escrow Agent to pay the Escrow Amount to
TCI. If TCI does identify and designate an Additional System within 45 days
after the Closing Date but the Additional System Closing Date does not occur
within 180 days after the Closing Date (the "Outside Additional System Closing
Date"), or the Additional System Agreement is terminated before the Outside
Additional System Closing Date, then on the earlier of the date of termination
of the Additional System Agreement and the Outside Additional Closing Date, Cox
shall direct the Escrow Agent to pay the Escrow Amount to TCI. If an Additional
System is identified and designated within 45 days after the Closing Date and
the Additional System Closing Date occurs on or before the Outside Additional
System Closing Date, then on the Additional System Closing Date, (i) if the
Additional System Purchase Price is less than or equal to the Cash
Consideration, Cox shall direct the Escrow Agent to pay (A) the amount of the
Additional System Purchase Price to the seller of the Additional System, and (B)
the remainder of the Escrow Amount (including interest) to TCI, if any; and (ii)
if the Additional System Purchase Price is greater than the Cash Consideration,
Cox shall direct the Escrow Agent to pay the Escrow Amount (including interest)
to the seller of the Additional System; provided, however, that TCI pays an
amount equal to the Additional System Purchase Price less the Escrow Amount
(including interest) to the seller of the Additional System. The Escrow
Agreement shall provide that all fees to be paid to the Escrow Agent shall be
borne by TCI, and, except as provided in clause (ii) above, all interest earned
on the Escrow Amount shall be paid to TCI.
4. Assumed Liabilities and Excluded Assets.
---------------------------------------
4.1. Assignment and Assumption. At the Closing, Transferor will
-------------------------
assign, and Transferee will assume and perform, the Assumed Liabilities (the
"Assumed Liabilities"), which are
13
<PAGE>
defined as: (i) Transferor's obligations to customers of the Systems for (A)
customer deposits held by Transferor as of the Closing Date and which are
refundable, in the amount for which Transferee received credit under Section
3.2, and (B) customer, advertising and other advance payments held by Transferor
as of the Closing Date for services to be rendered by Transferee on or after the
Closing Date, in the amount for which Transferee received credit under Section
3.2 and (ii) obligations accruing and relating to periods on or after the
Closing Date under Governmental Permits, Contracts and Real Property interests.
Transferee will not assume or have any responsibility for any liabilities or
obligations of Transferor, contingent, fixed or otherwise, other than the
Assumed Liabilities, including, without limitation, any liability for rate
refunds for any period prior to the Closing Date or any litigation commenced
prior to, or related to an event occurring prior to, the Closing Date. In no
event will Transferee assume or have any responsibility for any liabilities or
obligations associated with the Excluded Assets.
4.2. Excluded Assets. The Assets shall exclude the following assets,
---------------
which will be retained by the Transferor (the "Excluded Assets"):
4.2.1. Transferor's cash on hand as of the Closing Date and all
other cash or cash equivalents in any of Transferor's bank or savings accounts,
including without limitation, customer advance payments and deposits for which
Transferee receives credit pursuant to Section 3.2;
4.2.2. Any and all bonds, surety instruments, insurance policies
and all rights and claims thereunder, letters of credit or other similar items
and any cash surrender value in regard thereto, and any stocks, bonds,
certificates of deposit and similar investments;
4.2.3. Any books and records that Transferor is required by law
to retain and any books of account, tax reports and returns and the like related
to the Assets and business and operations of the Systems and any correspondence
or memoranda related to the foregoing, subject to the right of Transferee to
have access to and to copy such documents for a reasonable period, not to exceed
three years from the Closing Date, and Transferor's corporate minute books and
other books and records related to internal corporate matters and financial
relationships with Transferor's lenders and affiliates;
4.2.4. Any claims, rights or choses in action related to the
period prior to the Closing Date (other than customer and advertising accounts
receivable), including, without limitation, any claims, rights and interest in
and to any refunds of federal, state or local franchise, income or other taxes,
fees or payments of any nature whatsoever for periods prior to the Closing Date
including, without limitation, fees paid to the U.S. Copyright Office;
4.2.5. All programming agreements and retransmission consent
agreements (other than the local programming agreements, and retransmission
consents and must-carry notices listed on SCHEDULES 5.7 and 6.7) of Transferor
including those relating to or benefitting the Systems;
14
<PAGE>
4.2.6. Except as provided in Section 7.22, all owned or licensed
trademarks, trade names, service marks, service names, logos and similar
proprietary rights of the Transferor, and all patents of Transferor, whether or
not used in the business or operations of the Systems;
4.2.7. All tangible and intangible personal property owned,
leased or licensed by Transferor or any of Transferor's Affiliates that is used
or held for use in one or more of the Systems but also jointly and primarily
used or held for use in the ordinary course in cable television systems or other
operations of Transferor or its Affiliates other than the Systems, all material
items of which are listed on Exhibit C.
---------
4.2.8. Except to the extent provided in Section 7.3, any Employee
Plan, Compensation Arrangement or Multiemployer Plan;
4.2.9. All rights to receive fees or services from any Affiliate
of Transferor and any obligations or liabilities owing to any Affiliate of
Transferor unless pursuant to a Contract being assumed and listed in the
applicable Schedule to this Agreement;
4.2.10. Any assets acquired pursuant to pending cable system
transactions not consummated prior to December 31, 1995;
4.2.11. Any and all assets and rights of Transferor unrelated to
and not used in the business and the operations of the Systems;
4.2.12. Such office equipment and vehicles used exclusively in
the provision of Primestar service within the Service Areas as may hereafter be
agreed to by Transferor and Transferee, and all contracts and agreements for, or
related to the provision of Primestar services;
4.2.13. Other than items listed on SCHEDULE 5.1 (TCI Systems) or
SCHEDULE 6.1 (Cox Systems), all securities and partnership or other ownership
interests and all partnership, limited liability company or joint venture
agreements to which TCI or Cox, as applicable, is a party;
4.2.14. All credit, loan or other agreements under which TCI or
Cox, as applicable, has created, incurred, assumed or guaranteed indebtedness
for borrowed money or under which any Encumbrance securing such indebtedness has
been or may be imposed on any Asset;
4.2.15. All DCR or DMX subscriber agreements and all music
converter boxes utilized in Transferor's Systems, subject to the Transferee's
right to use such equipment on a temporary basis as permitted by Section 7.27
below;
4.2.16. The assets listed on Exhibit C hereto; and
---------
4.2.17. All equipment, software and agreements related to
Transferor's subscriber billing systems.
15
<PAGE>
5. Representations and Warranties of TCI Subsidiaries and TCI, L.P. To
---------------------------------------------------------------
induce Cox to enter into this Agreement, the TCI Subsidiaries and TCI, L.P.,
jointly and severally represent and warrant to Cox regarding the business and
the operations of the TCI Systems and TCI Assets, as of the date of this
Agreement and as of the Closing as follows:
5.1. Organization, Standing and Authority. Each of the TCI
------------------------------------
Subsidiaries is a corporation duly organized , validly existing and in good
standing under the laws of the state of its incorporation, and is qualified to
conduct business as a foreign corporation in each jurisdiction in which the
property owned, leased or operated by it requires it to be so qualified, except
where the failure to be so qualified would not have a System Material Adverse
Effect. TCI, L.P., is a limited partnership duly organized and validly existing
under the laws of the State of Colorado, and is qualified to conduct business as
a foreign limited partnership in each jurisdiction in which the property owned,
leased or operated by it requires it to be so qualified, except where the
failure to be so qualified would not have a System Material Adverse Effect. The
jurisdictions of organization of each of the TCI Subsidiaries are disclosed on
SCHEDULE 5.1. Each TCI Subsidiary has the requisite corporate power and
authority and TCI, L.P., has the requisite partnership power and authority (i)
to own, lease and use the TCI Assets as presently owned, leased and used by it
and (ii) to conduct the business and operations of the TCI Systems owned by it
as presently conducted by it. Except as set forth in either Exhibit C or
---------
SCHEDULE 5.1, none of the TCI Subsidiaries or TCI, L.P., is a participant in any
joint venture or partnership with any other person or entity with respect to any
part of the businesses or operations of the TCI Systems or the TCI Assets,
including advertising sales joint ventures or partnerships that relate
exclusively to the TCI Systems.
5.2. Authorization and Binding Obligation. Each TCI Subsidiary has
------------------------------------
the corporate power and authority and TCI, L.P., has the partnership power and
authority to execute and deliver this Agreement and all other agreements,
instruments and certificates contemplated hereby and thereby to be executed by
it (collectively, the "TCI Related Agreements") and to carry out and perform all
of its other obligations under the terms of this Agreement and the TCI Related
Agreements. All corporate and partnership action by each of the TCI
Subsidiaries and by TCI, L.P., necessary for the authorization, execution,
delivery and performance by each of the TCI Subsidiaries and by TCI, L.P., of
this Agreement and the TCI Related Agreements has been taken and such action has
not been rescinded, repealed or amended. This Agreement has been duly executed
and delivered by each TCI Subsidiary and by TCI, L.P., and this Agreement and
the TCI Related Agreements constitute or will, when executed and delivered,
constitute the valid and legally binding obligations of each TCI Subsidiary and
TCI, L.P., enforceable against it in accordance with their respective terms,
except (i) as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect affecting
the enforcement of creditors' rights generally and (ii) as the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
5.3. No Consents; Absence of Conflicting Agreements. Except for the
----------------------------------------------
TCI Required Consents listed on SCHEDULE 5.3, the Cox Required Consents and
compliance with the HSR Act, no consent, approval, permit or authorization of,
or declaration to or filing with any
16
<PAGE>
Governmental Authority or any other third party is required to consummate this
Agreement and the TCI Related Agreements and the transactions contemplated
hereby and thereby, except that no representation or warranty is given with
respect to any consents required to enter into and perform in accordance with
the Management Agreement contemplated by Section 10 and except for any consent
the absence of which would not have a System Material Adverse Effect. Subject to
obtaining the TCI Required Consents listed on SCHEDULE 5.3 and compliance with
the HSR Act and the limitation regarding Section 10 hereof set forth in the
preceding sentence, the execution, delivery and performance of this Agreement by
TCI will not: (i) violate the Articles of Incorporation or Bylaws of any TCI
Subsidiary or the Partnership Agreement of TCI, L.P., (ii) violate any Legal
Requirement applicable to TCI with respect to the TCI Assets or the business or
operations of the TCI Systems or (iii) conflict with, constitute grounds for
termination of, result in a breach of, constitute a default under, accelerate or
permit the acceleration of any performance required by the terms of, or result
in the creation or imposition of any Encumbrance under, any agreement,
instrument, license or permit to which TCI is a party or may be bound and by
which the TCI Assets or the business or operations of the TCI Systems are
affected, excluding from the foregoing clauses (ii) and (iii) such violations,
conflicts, terminations, breaches, defaults and accelerations as would not,
individually or in the aggregate, have a System Material Adverse Effect or a
material adverse effect on the ability of TCI to perform its obligations under
this Agreement or the TCI Related Agreements.
5.4. Governmental Permits. SCHEDULE 5.4 includes a true and complete
--------------------
list of all TCI Franchises and all other material TCI Governmental Permits.
True and complete copies of the TCI Governmental Permits disclosed on SCHEDULE
5.4 (together with any and all amendments and any proposals or material
correspondence thereto) have been delivered to Cox. Except as set forth on
SCHEDULE 5.4, the TCI Franchises contain all of the commitments and obligations
of the TCI Subsidiaries and TCI, L.P. to the applicable Governmental Authorities
with respect to the construction, ownership and operation of the TCI Systems.
Except as set forth on SCHEDULE 5.4, the TCI Governmental Permits are valid
under all applicable Legal Requirements according to their terms and are
currently in full force and effect. Except as listed on SCHEDULE 5.4, there is
no legal action, governmental proceeding or investigation pending or, to the
knowledge of TCI, threatened, to terminate, suspend or modify any TCI
Governmental Permit and the TCI Subsidiaries and TCI, L.P. are, and to the
knowledge of TCI, each other party thereto is, in compliance with the terms and
conditions of all the TCI Governmental Permits and with other applicable
requirements of all Governmental Authorities relating to the TCI Governmental
Permits, including all requirements for notification, filing, reporting, posting
and maintenance of logs and records, except for such noncompliance which would
not, individually or in the aggregate, have a System Material Adverse Effect.
Except as set forth on SCHEDULE 5.4, no person (including any Governmental
Authority) has as of the date hereof any right to acquire any interest in any of
the TCI Systems or the TCI Assets (including any right of first refusal or
similar right), other than rights of condemnation or eminent domain afforded by
law or upon the termination of or default under any Franchise. The TCI
Franchises marked with an asterisk on SCHEDULE 5.4 constitute all of the
communities where the local franchising or other regulatory authority has
certified to regulate rates charged to customers of the TCI Systems pursuant to
the Cable Act or where a customer service rate complaint is pending before the
FCC.
17
<PAGE>
5.5. Real Property. SCHEDULE 5.5 contains a list of all Real Property
-------------
owned, leased or occupied by the TCI Subsidiaries or TCI, L.P. with respect to
the TCI Systems and all easements or other interests in Real Property to which
any of the TCI Subsidiaries is a party as of the date hereof with respect to the
TCI Systems, except for those easements and other interests which if not held by
the TCI Subsidiaries or TCI, L.P. would not have a System Material Adverse
Effect. TCI has delivered to Cox true and complete copies of all deeds and
leases pertaining to such Real Property including leases by TCI as lessor. All
Real Property Leases, if any, that are leased from or to Affiliates of TCI are
identified as such on SCHEDULE 5.5. As to the Real Property which is designated
in SCHEDULE 5.5 as being owned in fee simple by the TCI Subsidiaries, except as
set forth in SCHEDULE 5.5, as of the date of this Agreement the TCI Subsidiaries
have and as of the Closing Date, TCI, L.P. will have, good and marketable title
in fee simple to such premises and all buildings, improvements and fixtures
thereon, free and clear of all Encumbrances, except for Permitted Encumbrances.
As to the Real Property which is designated in SCHEDULE 5.5 as being leased by a
TCI Subsidiary, except where the failure of the representations made in this
sentence to be true and correct would not have a System Material Adverse Effect,
as of the date of this Agreement such TCI Subsidiary is and as of the Closing
Date TCI, L.P. will be, the sole owner of the leasehold interest in such Real
Property, each such lease is valid and subsisting and in full force and effect
and, as of the date hereof, no other party to such lease has given written
notice to such TCI Subsidiary or TCI, L.P. of or made a written claim with
respect to any breach or default thereof and TCI is not aware of any fact giving
rise to a breach or default thereof. Subject to Permitted Encumbrances, except
as otherwise disclosed in SCHEDULE 5.5 and except where the failure of the
representations made in this sentence to be true and correct would not have a
System Material Adverse Effect, all Real Property listed on SCHEDULE 5.5
(including the improvements thereon) (i) is in reasonable operating condition
and repair (subject to normal wear and tear) consistent with its present use,
(ii) is available for immediate use in the conduct of the business or operations
of the TCI Systems, (iii) complies in all material respects with all applicable
building or zoning codes or restrictive covenants and the regulations of any
Governmental Authority having jurisdiction, (iv) has full legal and practical
access to public roads or streets and has all utilities and services necessary
for the proper and lawful conduct and operation of the TCI Systems as presently
utilized. Except where the failure of the representations made in this sentence
to be true and correct would not have a System Material Adverse Effect, all
buildings, towers, guy wires and anchors, earth-receiving dishes and related
facilities used in the operations of the TCI Systems are located entirely on the
TCI Real Property, and together with all pole attachments, cable plant and cable
installations, equipment and facilities used in connection with the TCI Systems
are maintained, placed and located in accordance with the provisions of all
applicable Legal Requirements, deeds, leases, licenses, permits or other legally
enforceable arrangements. No condemnation of any of the TCI Real Property has
occurred, is pending or, to the knowledge of TCI, threatened. Except as set
forth on SCHEDULE 5.5, each Person upon or under or across whose property any
of the TCI Assets are located, maintained, installed or operated (other than
drop lines to customer dwellings) has granted to the TCI Subsidiaries or TCI,
L.P. such easements, licenses or rights of way as are necessary for the
location, maintenance, installation and operation of such TCI Assets upon, over
or under such property (the "TCI Easements"), and subject to Permitted
Encumbrances, as of the date of this Agreement the TCI Subsidiaries have and as
of the Closing Date TCI, L.P. will have, a right to use the TCI Easements
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except where the failure to have any such TCI Easements would not, individually
or in the aggregate, have a System Material Adverse Effect.
5.6. Tangible Personal Property. Except with respect to leased
--------------------------
property, the TCI Subsidiaries have and as of the Closing Date TCI, L.P. will
have good title to all TCI Tangible Personal Property, and as of the Closing
Date none of the TCI Tangible Personal Property will be subject to any
Encumbrance, except for Permitted Encumbrances. The principal items of TCI
Tangible Personal Property as of the date of this Agreement are listed on
SCHEDULE 5.6. Except as set forth in SCHEDULE 5.6, the TCI Tangible Personal
Property is in reasonable operating condition and repair (subject to normal wear
and tear), and is available for immediate use in the conduct of the business or
operations of the TCI Systems except for that which is subject to routine
maintenance or repair. All items of cable plant, earth station and headend
equipment included in the TCI Tangible Personal Property (i) have been
maintained in a manner consistent in all material respects with generally
accepted standards of good engineering practice and (ii) will permit the TCI
Systems to operate in all material respects in accordance with the terms of the
TCI Governmental Permits. The amount of the TCI Systems' inventory is
sufficient to permit the continued maintenance and operation of the TCI Systems
for at least a 30-day period.
5.7. Contracts. Except as described on SCHEDULE 5.7, neither the TCI
---------
Subsidiaries nor TCI, L.P. is party to any of the following that relate to the
TCI Systems other than Excluded Assets: (i) pole attachment or line agreements
and joint pole or line agreements, (ii) leases of personal property for a term
exceeding one year or requiring payments of more than $50,000, (iii) agreements
pursuant to which the TCI Systems receive or provide advertising sales
representation services, (iv) agreements pursuant to which a TCI System has
constructed or agreed to construct for third parties an institutional network or
otherwise provides to third parties telecommunications services other than one-
way video, (v) agreements with commercial customers or bulk-billed customers
pursuant to which such customers are charged in excess of $500 per month, (vi)
multiple dwelling unit access agreements, (vii) construction and development
agreements (other than agreements with installers and agreements where the
remaining amount payable thereunder will be less than $50,000 as of the Closing)
or (viii) noncompetition agreements or rights of first refusal that relate to
the TCI Systems and are in favor of TCI. SCHEDULE 5.7 contains a true and
correct list of all other TCI Contracts except for: (A) subscription agreements
for cable television services provided by the TCI Systems with residential
customers that are not bulk-billed, (B) oral employment contracts and
miscellaneous service contracts terminable at will or on no more than 30 days'
notice without penalty and (C) any other contract not required to be listed
pursuant to the first sentence of this Section 5.7 and not involving either
liabilities under such contract exceeding $50,000 per year or any material
nonmonetary obligation. Notwithstanding the foregoing, SCHEDULE 5.7 contains a
separate and complete list of all retransmission consent agreements relating to
the TCI Systems, other than those excluded pursuant to Section 4.2.5, showing
the expiration date of each. TCI has delivered to Cox true and complete copies
of all written TCI Contracts listed in SCHEDULE 5.7. All of the TCI Contracts
listed in SCHEDULE 5.7 are valid and binding and, to the knowledge of TCI, in
full force and effect and legally enforceable in accordance with their terms
upon the other parties thereto. There is not under any TCI Contract any default
by any of the TCI Subsidiaries or TCI, L.P. or, to the knowledge of the TCI
Subsidiaries or TCI, L.P., any other party
19
<PAGE>
thereto or event which, after notice or lapse of time, or both, would constitute
such a default, except for such defaults which, individually or in the
aggregate, would not have a System Material Adverse Effect. Except as disclosed
on SCHEDULE 5.7, to the knowledge of TCI (x) there has not been any threatened
cancellation of any TCI Contracts (other than the cancellation of cable service
by customers at normal and customary levels), (y) there are no outstanding
disputes thereunder and (z) there is no basis for any claim of breach or default
thereunder. Other than where expressly noted in SCHEDULE 5.7, no Affiliate of
TCI (other than the TCI Subsidiaries) is a party to any of the personal property
leases disclosed on SCHEDULE 5.7.
5.8. Complete System. Except for those assets which are TCI Excluded
---------------
Assets, the TCI Assets comprise all of the assets (without material exception)
necessary to conduct the business and operations of the TCI Systems as presently
conducted.
5.9. Trademarks, Trade Names and Copyrights. SCHEDULE 5.9 contains a
--------------------------------------
true and complete list of all material trade names used by TCI in its operation
of the TCI Systems. Except as disclosed on SCHEDULE 5.9, TCI does not own or
use any patent, patent right, or copyright that is material to the operation of
any TCI System and TCI is not a party to any patent or copyright license or
royalty agreement with respect to its operation of any TCI System, except for
software licenses, licenses in respect of program material and obligations under
the Copyright Act of 1976 applicable to cable television systems generally.
Except as disclosed on SCHEDULE 5.9, TCI possesses or has the right to use all
Intangibles used in the operation and conduct of the business of the TCI Systems
without any conflicts with the rights of others that, individually or in the
aggregate, would have a System Material Adverse Effect. All of the Intangibles
are (a) either owned as of the date of this Agreement by the TCI Subsidiaries or
will as of the Closing Date be owned by TCI, L.P. free and clear of all
Encumbrances, except for Permitted Encumbrances or (b) as of the date of this
Agreement the TCI Subsidiaries have and as of the Closing Date TCI, L.P. will
have the valid and enforceable right to use such Intangibles. TCI is not aware
that any of the TCI Subsidiaries or TCI, L.P. is infringing upon or otherwise
acting adversely to any trademarks, trade names, copyrights, patents, patent
applications, know-how, methods or processes owned by any other person or
persons, and there is no claim or action pending, or to the knowledge of TCI,
threatened, with respect thereto, except for any infringement, claims or actions
that would not have a System Material Adverse Effect.
5.10. Information on TCI Systems.
--------------------------
5.10.1. SCHEDULE 5.10.1 lists for each of the TCI Systems as of
the date referenced in SCHEDULE 5.10.1 (i) the total number of miles of fully
completed and operational trunk and distribution cable, differentiating the
number of miles of aerial plant and the number of miles of underground plant,
(ii) the number of dwellings (as defined below) and commercial premises passed,
(iii) the total number of Equivalent Billing Units, the number of Equivalent
Billing Units that are residential and the number of Equivalent Billing Units
that are commercial or bulk-billed, (iv) the bandwidth capacity of each such
System specified in MHz, and (v) the number of channels activated throughout
each System (i.e., over 100% of the plant miles). SCHEDULE 5.10.1 also describes
for each of the TCI Systems in which an upgrade is in progress, the number of
miles and
20
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percentage of the cable plant that has been upgraded, the bandwidth and channel
capacity of the upgraded plant and the anticipated rate of rebuild or expansion
for the next four quarters.
5.10.2. As used in this Section 5.10, "dwellings" means a home
or other residential unit that can be legally serviced by a System by using no
more than 300 feet of drop cable.
5.10.3. The rates charged to customers for each class of service
(including equipment, installation and late fees) for each of the TCI Systems
as of the date of this Agreement, are set forth in SCHEDULE 5.10.3.
5.10.4. The TCI Systems duly and properly carry and deliver the
channels indicated in SCHEDULE 5.10.4. The TCI Subsidiaries have obtained all
required FCC clearances for the operation of the TCI Systems in all necessary
aeronautical frequency bands.
5.10.5. Except as disclosed in SCHEDULE 5.10.5 and other than as
expressly stated in a TCI Contract disclosed in SCHEDULE 5.7, to the knowledge
of TCI, as of the date of this Agreement, none of the TCI Subsidiaries has and
as of the Closing Date TCI, L.P. will not have, any obligation or understanding
to pay third parties for the right to access multiple dwelling units, commercial
establishments or subdivision developments, which obligation or understanding
will extend beyond the Closing Date.
5.10.6. Except as described in SCHEDULE 5.10.6, there are no
franchise, construction, fidelity, performance, or other bonds, surety
instruments, letters of credit or other similar items posted or delivered by TCI
Subsidiaries or TCI, L.P. in connection with the TCI Systems or the TCI Assets.
5.10.7. Except as described in SCHEDULE 5.10.7, the TCI Assets
do not include any multi-point distribution system, multi-channel multi-point
distribution system or satellite master antenna system that is not connected to
a TCI System headend.
5.11. Financial Statements.
--------------------
5.11.1. SCHEDULE 5.11 contains true and complete copies of
unaudited statements of each TCI Subsidiary with respect to the TCI Systems
containing balance sheets and statements of income as, at and for the 12 months
ended December 31, 1994 and 1995 (collectively, the "TCI Financial Statements").
The TCI Financial Statements are prepared in accordance with GAAP consistently
applied, except for the absence of footnotes and except as specifically
described in SCHEDULE 5.11. The TCI Financial Statements are in accordance with
the books and records of each such TCI Subsidiary and present fairly the
operating income and financial condition of the TCI Systems as at their
respective dates and the results of operations for the periods then ended. Other
than as described in SCHEDULE 5.11, none of the TCI Financial Statements
understates the true costs and expenses of conducting the business or operations
of the TCI Systems or inflates the revenue
21
<PAGE>
of the TCI Systems because of the provision of services or the bearing of costs
or expenses or the payment of fees by any other person or for any other reason.
5.12. Employee Benefit Plans.
----------------------
5.12.1. All Employee Plans and material Compensation
Arrangements currently providing benefits to employees, former employees or
independent contractors of the TCI Systems are listed and described in SCHEDULE
5.12 ("TCI System Plans"), and copies of any such written TCI System Plans (and
any related insurance policies, trusts, etc.) and written descriptions of any
unwritten TCI System Plans have been made available to Cox, along with copies of
any currently available employee handbooks and any other documents used to
describe such TCI System Plans to the covered individuals. Except as disclosed
in SCHEDULE 5.12, there is not now in effect or scheduled as of the date of this
Agreement to become effective after the date of this Agreement, any new TCI
System Plans or any amendment to an existing TCI System Plan which will
materially affect the benefits of employees, former employees or independent
contractors of the TCI Systems.
5.12.2. Each TCI System Plan has been adopted, amended and
administered in compliance with its own terms and, where applicable, ERISA, the
Code, the Age Discrimination in Employment Act and any other applicable Legal
Requirements, except for such noncompliance which would not, individually or in
the aggregate, have a System Material Adverse Effect.
5.12.3. Except as disclosed in Schedule 5.12, no Multiemployer
Plan provides or has ever provided benefits to any employee or former employee
of the TCI Systems.
5.12.4. Except as disclosed in Schedule 5.12, no TCI Subsidiary
nor any entity under common control with any of the TCI Subsidiaries (under
Sections 414(b), (c) (m) and (o) of the Code) is aware of the existence of any
governmental audit or examination of any TCI System Plan or of any facts which
would lead them to believe that any such audit or examination is pending or
threatened. There exists no action, suit or claim (other than routine claims
for benefits) with respect to any TCI System Plan pending, or to the knowledge
of TCI and each entity under common control with any of the TCI subsidiaries
(under Sections 414(b), (c), (m) and (o) of the Code), threatened against any
TCI System Plan.
5.13. Labor Relations. SCHEDULE 5.13 lists the names, positions and
---------------
dates of hire of all persons employed by the TCI Subsidiaries as of the date of
this Agreement directly and principally in connection with the operation of the
TCI Systems (the "TCI Employees"). No TCI Subsidiary or TCI, L.P. has any
written or oral contracts of employment with any TCI Employee, other than (i)
oral employment agreements terminable at will without penalty or (ii) those
listed in SCHEDULE 5.7. Each TCI Subsidiary in the operation of the TCI Systems
has complied with all applicable Legal Requirements relating to the employment
of labor, including those related to wages, hours, collective bargaining,
occupational safety, discrimination and the payment of social security and other
payroll-related taxes; except for such noncompliance which would not,
individually or in the aggregate, have a System Material Adverse Effect. Except
as described on SCHEDULE 5.13, no TCI Subsidiary or TCI, L.P. is a party to any
collective bargaining agreement
22
<PAGE>
or other contract with any labor organization regarding any of the TCI
Employees, and no TCI Subsidiary or TCI, L.P. has recognized or agreed to
recognize and is not required to recognize any union or other collective
bargaining representative of the TCI Employees. Except as set forth in SCHEDULE
5.13, no union or other collective bargaining representative claims to represent
or has been certified as representing any of the TCI Employees, nor has any TCI
Subsidiary or TCI, L.P. received any requests from any party for recognition as
a representative of the TCI Employees for collective bargaining purposes. Except
as set forth in SCHEDULE 5.13, the TCI Employees are not engaged in or subject
to any organizing activity with respect to any labor organization and, to the
knowledge of TCI, no such activity is threatened. Except as set forth in
SCHEDULE 5.13, there is no strike, work slowdown, picketing or any other labor
disputes or controversies or proceedings pending or threatened between the TCI
Subsidiaries or TCI, L.P. and any of the TCI Employees or any labor union or
collective bargaining representative claiming to represent any of the TCI
Employees. No TCI Subsidiary or TCI, L.P. has any employment agreement of any
kind, oral or written, express or implied, that would require Cox to employ any
Person after the Closing Date.
5.14. Tax Returns; Other Reports. The TCI Subsidiaries and/or TCI,
--------------------------
L.P. have duly and timely filed in proper form all income, franchise, sales,
use, property, excise, payroll and other tax returns and all other reports
(whether or not relating to taxes) required to be filed with the appropriate
Governmental Authority with respect to the Systems. All taxes, fees and
assessments of whatever nature due and payable by the TCI Subsidiaries or TCI,
L.P. with respect to the Systems have been paid, except such amounts as are
being contested diligently and in good faith and are not in the aggregate
material. Except as set forth in SCHEDULE 5.14, there are no pending state or
local sales tax audits relating to the TCI Systems. Except as set forth in
SCHEDULE 5.14, neither TCI , L.P. nor any of the TCI Subsidiaries has received
any property, sales and use, or franchise fee or tax audit notice or any other
notice or assessment to the effect that there is any unpaid interest, penalty or
taxes due or claimed to be due from the TCI Subsidiaries with respect to the TCI
Assets or the business or operations of the TCI Systems.
5.15. Claims and Legal Actions. Except as set forth in SCHEDULE 5.15,
------------------------
except as may affect the cable industry generally, and except for suits being
defended by TCI's insurance carriers for which there is adequate coverage, there
is (i) no legal action, counterclaim, suit, arbitration, (ii) to the knowledge
of TCI, no claim or governmental investigation or (iii) no other legal,
administrative or tax proceeding, nor any order, decree or judgment, in progress
or pending, or to the knowledge of TCI, threatened against or relating to the
TCI Assets or business or operations of the TCI Systems.
5.16. Environmental Matters.
---------------------
5.16.1. The TCI Real Property is in compliance with and, to the
knowledge of TCI, has previously been operated in compliance with, all
Environmental Laws, except for such noncompliance which, individually or in the
aggregate, would not have a System Material Adverse Effect. Except as set forth
in SCHEDULE 5.16 and except where the failure of the representations made in
this sentence to be true and correct would not have a System Material Adverse
Effect, no TCI Subsidiary has generated, released, stored, used, treated,
handled, discharged or disposed of any
23
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Hazardous Substances at, on, under, in or about, or in any other manner
affecting, any TCI Real Property, transported any Hazardous Substances to or
from any TCI Real Property or discharged any Hazardous Substances from any TCI
Real Property into any body of water, directly or indirectly, or undertaken or
caused to be undertaken any other activities relating to the TCI Real Property,
which would support a claim or cause of action under any Environmental Law, and,
to the knowledge of TCI, no other present or previous owner, tenant, occupant or
user of any TCI Real Property or any other Person has committed or suffered any
of the foregoing. Except where the failure of the representations made in this
sentence to be true and correct would not have a System Material Adverse Effect,
to the knowledge of TCI, no release of Hazardous Substances outside the TCI Real
Property has entered or threatens to enter any TCI Real Property nor is there
any pending or threatened claim based on Environmental Laws that arises from any
condition of the land surrounding any TCI Real Property. No claim or
investigation based on Environmental Laws which relates to any TCI Real Property
or any operations or conditions on it (i) has been asserted or conducted in the
past or is currently pending against or with respect to the TCI Subsidiaries or
TCI, L.P. or, to the knowledge of TCI, any other Person or (ii) to the knowledge
of TCI, is threatened or contemplated.
5.16.2. Except as set forth in SCHEDULE 5.16 and except where
the failure of the representations made in this sentence to be true and correct
would not have a System Material Adverse Effect, to the knowledge of TCI, (i) no
underground storage tanks are currently or have been located on any TCI Real
Property, (ii) no TCI Real Property has been used at any time as a gasoline
service station or any other facility for storing, pumping, dispensing or
producing gasoline or any other petroleum products or wastes, (iii) no building
or other structure on any TCI Real Property contains friable asbestos, and (iv)
there are no incinerators or cesspools on the TCI Real Property and all domestic
waste is discharged into a public sanitary sewer system.
5.16.3. TCI has provided Cox with complete and correct copies of
(i) all studies, reports, surveys or other materials in the possession of TCI,
L.P. or the TCI Subsidiaries relating to the presence or alleged presence of
Hazardous Substances at, on or affecting the TCI Real Property, (ii) all notices
or other materials in the possession of TCI, L.P. or the TCI Subsidiaries that
were received during the past two years from any Governmental Authority having
the power to administer or enforce any Environmental Laws relating to current or
past ownership, use or operation of the TCI Real Property or activities at the
TCI Real Property and (iii) all materials in the possession of TCI, L.P. or the
TCI Subsidiaries relating to any claim, allegation or action by any private
third party under any Environmental Law.
5.17. Compliance with Laws. The TCI Subsidiaries and TCI, L.P. have
--------------------
complied and are in compliance with all Legal Requirements applicable to the TCI
Systems in the operation of the business and the ownership of the TCI Assets,
except for such noncompliance which would not, individually or in the aggregate,
have a System Material Adverse Effect. Except as set forth in SCHEDULE 5.17,
neither the TCI Subsidiaries nor TCI, L.P. have received notice claiming a
violation by TCI of any Legal Requirement applicable to the TCI Systems as
currently conducted and to the knowledge of the TCI Subsidiaries, there is no
basis for any claim that such a violation exists. The representations and
warranties in this SECTION 5.17 do not apply to compliance with, or notices with
24
<PAGE>
respect to, the Communications Act and the rules and regulations of the FCC, as
to which the representations and warranties in SECTION 5.19 will apply.
5.18. Conduct of Business in Ordinary Course. Except as set forth on
--------------------------------------
SCHEDULE 5.18, since December 31, 1995, (i) the TCI Subsidiaries and/or TCI,
L.P. have conducted the business and operations of the TCI Systems only in the
ordinary and usual course substantially in the same manner as previously
conducted, (ii) the liabilities incurred or accrued in the ordinary course of
business do not, individually or in the aggregate, have a System Material
Adverse Effect, and (iii) neither the TCI Subsidiaries nor TCI, L.P. have
suffered any changes, events or conditions which have had a System Material
Adverse Effect.
5.19. FCC and Copyright Compliance.
----------------------------
5.19.1. The operation of each of the TCI Systems has been, and
is, in compliance with the Communications Act and the rules and regulations of
the FCC, except for such noncompliance which would not, individually or in the
aggregate, have a System Material Adverse Effect and except for Legal
Requirements with respect to rates charged to customers as to which the
representations set forth in SECTION 5.19.2 shall apply. The TCI Subsidiaries
and/or TCI, L.P. have made all material filings required to be made with the FCC
(including cable television registration statements, annual reports and
aeronautical frequency usage notices) and have provided all material notices to
customers required under the Communications Act and the FCC's rules and
regulations. The TCI Subsidiaries and/or TCI, L.P. are and since 1988 have been
certified as in compliance with, the FCC's equal employment opportunity rules
and the TCI Systems are in material compliance with all signal leakage criteria
prescribed by the FCC. With respect to the TCI Systems, the TCI Subsidiaries
have complied in all material respects with the specifications set forth in Part
76, Subpart K of the rules and regulations of the FCC and other provisions of
the Communications Act or the rules and regulations of the FCC pertaining to
signal leakage, to utility pole make ready and to grounding and bonding of cable
television systems (in each case as the same is currently in effect).
5.19.2 The TCI Subsidiaries have complied in all material
respects with the must carry and retransmission consent provisions of the Cable
Act and the FCC rules and regulations promulgated thereunder as such provisions
relate to the TCI Systems. Except as set forth in SCHEDULE 5.19, no written
notices or demands have been received from the FCC, from any television station,
or from any other Person, station, Governmental Authority or unit challenging
the right of the TCI Systems to carry any signal or deliver the same. Except as
set forth on SCHEDULE 5.19, the TCI Subsidiaries have used commercially
reasonable efforts to establish rates charged to customers, effective since
September 1, 1993, that would be allowable under rules and regulations
promulgated by the FCC under the Cable Act, and any authoritative interpretation
thereof, whether or not such rates were subject to regulation by any
Governmental Authority, including the local franchising authority and/or the
FCC, and such rates as computed under the FCC's rules and regulations are
permitted rates except as set forth in SCHEDULE 5.19. TCI has delivered to Cox
complete and correct copies of all FCC 393 Forms and FCC 1200 Series Forms
provided to local franchising authorities or the FCC with respect to the TCI
Systems and copies of all material correspondence with any
25
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Governmental Authority relating to rate regulation generally or specific rates
charged to customers with respect to the TCI Systems, including, without
limitation, copies of any complaints and responses filed with the FCC with
respect to any rates charged to customers of the TCI Systems and any other
documentation supporting an exemption from the rate regulation provisions of the
Cable Act claimed with respect to any of the TCI Systems. TCI makes no
representation or warranty with respect to the effect of the cable television
industry-wide dispute concerning music licensing fees. Except as set forth in
SCHEDULE 5.19, the TCI Subsidiaries have received no notice from any
Governmental Authority with respect to an intention to enforce customer service
standards pursuant to the Cable Act with respect to the TCI Systems and no TCI
Subsidiary has agreed with any Governmental Authority to establish customer
service standards for the TCI Systems that exceed the standards in the Cable
Act. No TCI Subsidiary has made any election with respect to any cost of service
proceeding conducted in accordance with Part 76.922 of Title 47 of the Code of
Federal Regulations or any similar proceeding (a "Cost of Service Election")
with respect to any of the TCI Systems.
5.19.3. The TCI Subsidiaries have deposited on a timely basis
with the U.S. Copyright Office all statements of account and other documents and
instruments, and paid all royalties, supplemental royalties, fees and other sums
to the U.S. Copyright Office under the Copyright Act of 1976, as amended (the
"Copyright Act"), with respect to the business and operations of the TCI Systems
as are required to obtain, hold and maintain the compulsory license for cable
television systems prescribed in Section 111 of the Copyright Act. The TCI
Subsidiaries and the TCI Systems are in compliance with the Copyright Act and
the rules and regulations of the U.S. Copyright Office, except as to potential
copyright liability arising from the performance, exhibition or carriage of any
music on the TCI Systems, and except for such noncompliance which would not,
individually or in the aggregate, have a System Material Adverse Effect. Except
as set forth in SCHEDULE 5.19, to the knowledge of TCI, there is no inquiry,
claim, action or demand pending before the U.S. Copyright Office or from any
other party which questions the copyright filings or payments made by the TCI
Subsidiaries with respect to the TCI Systems.
5.19.4. All necessary FAA approvals have been obtained with
respect to the height and location of towers used in connection with the
operation of the TCI Systems and are listed in SCHEDULE 5.19. The towers are
being operated in compliance in all material respects with applicable FCC and
FAA rules.
5.19.5. A valid request for renewal has been timely filed
pursuant to Section 626(a) of the Cable Act with the proper Governmental
Authority with respect to any TCI Franchise expiring within 30 months after the
date of this Agreement.
5.20. Accounts Receivable. All of the accounts receivable which are
-------------------
the subject of the adjustments provided in Section 3.2.4 and 3.2.5 have arisen
from bona fide transactions in the ordinary course of TCI's business consistent
with past practice.
5.21. Competitive Activity. To the knowledge of TCI, as of the date of
--------------------
this Agreement, except as set forth on SCHEDULE 5.21, (i) there are no third
parties (as to TCI and Cox)
26
<PAGE>
operating cable television systems or overbuilds in the TCI Service Areas, and
(ii) no Franchise or other operating authority for a cable television system has
been granted to any third party (as to TCI and Cox) by the appropriate
Governmental Authority in the TCI Service Areas, and, to the knowledge of TCI,
no third party (as to TCI and Cox) is seeking such a Franchise or other
operating authority. To the knowledge of the TCI Subsidiaries, no third party
(as to TCI and Cox) intends to construct or operate any of the foregoing or is
seeking to construct or operate any of the foregoing.
5.22. Cure. For all purposes under this Agreement, the existence or
----
occurrence of any events or circumstances that constitute or cause a breach of a
representation or warranty of TCI made in this Agreement (including, without
limitation, the schedules hereto) on the date such representation or warranty is
made shall not constitute a breach of such representation or warranty if such
event or circumstance is cured within 30 days of its existence or occurrence,
but in no event later than 10 days prior to the date scheduled for Closing.
6. Representations and Warranties of Cox . To induce the TCI
--------------------------------------
Subsidiaries and TCI, L.P. to enter into this Agreement, Cox represents and
warrants to TCI regarding the business and operations of the Cox Systems and Cox
Assets, as of the date of this Agreement and as of the Closing Date, as follows:
6.1 Organization, Standing and Authority. Cox is a corporation duly
------------------------------------
organized, validly existing and in good standing under the laws of the state of
its incorporation, and is qualified to conduct business as a foreign corporation
in each jurisdiction in which the property owned, leased or operated by it
requires it to be so qualified, except where the failure to be so qualified
would not have a System Material Adverse Effect. The jurisdiction of
incorporation of Cox is disclosed on SCHEDULE 6.1. Cox has the requisite
corporate power and authority (i) to own, lease and use the Cox Assets as
presently owned, leased and used by it and (ii) to conduct the business and
operations of the Cox Systems owned by it as presently conducted by it. Except
as set forth in either Exhibit C or SCHEDULE 6.1, Cox is not a participant in
---------
any joint venture or partnership with any other person or entity with respect to
any part of the business or operations of the Cox Systems or the Cox Assets,
including advertising sales joint ventures or partnerships that relate
exclusively to the Cox Systems.
6.2 Authorization and Binding Obligation. Cox has the corporate
------------------------------------
power and authority to execute and deliver this Agreement and all other
agreements, instruments and certificates contemplated hereby and thereby to be
executed by it (collectively, the "Cox Related Agreements") and to carry out and
perform all of its other obligations under the terms of this Agreement and the
Cox Related Agreements. All corporate action by Cox necessary for the
authorization, execution, delivery and performance by Cox of this Agreement and
the Cox Related Agreements has been taken and such corporate action has not been
rescinded, repealed or amended. This Agreement has been duly executed and
delivered by Cox and this Agreement and the Cox Related Agreements constitute or
will, when executed and delivered, constitute the valid and legally binding
obligations of Cox, enforceable against it in accordance with their respective
terms, except (i) as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect affecting
the enforcement of creditors' rights generally and (ii) as the remedy of
specific performance and injunctive and other forms of equitable relief may be
27
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subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
6.3. No Consents; Absence of Conflicting Agreements. Except for the
----------------------------------------------
Cox Required Consents listed on SCHEDULE 6.3, the TCI Required Consents and
compliance with the HSR Act, no consent, approval, permit or authorization of,
or declaration to or filing with any Governmental Authority or any other third
party is required to consummate this Agreement and the Related Agreements and
the transactions contemplated hereby and thereby, except that no representation
or warranty is given with respect to any consents required to enter into and
perform in accordance with the Management Agreement contemplated by Section 10
and except for any consent the absence of which would not have a System Material
Adverse Effect. Subject to obtaining the Cox Required Consents listed on
SCHEDULE 6.3 and compliance with the HSR Act and the limitations regarding
Section 10 hereof set forth in the preceding sentence, the execution, delivery
and performance of this Agreement by Cox will not: (i) violate the Articles of
Incorporation or Bylaws of Cox, (ii) violate any Legal Requirement applicable to
Cox with respect to the Cox Assets or the business or operations of the Cox
Systems or (iii) conflict with, constitute grounds for termination of, result in
a breach of, constitute a default under, accelerate or permit the acceleration
of any performance required by the terms of, or result in the creation or
imposition of any Encumbrance under, any agreement, instrument, license or
permit to which Cox is a party or may be bound and by which the Cox Assets or
the business or operations of the Cox Systems are affected, excluding from the
foregoing clauses (ii) and (iii) such violations, conflicts, terminations,
breaches, defaults and accelerations as would not, individually or in the
aggregate, have a System Material Adverse Effect or a material adverse effect on
the ability of Cox to perform its obligations under this Agreement or the Cox
Related Agreements.
6.4. Governmental Permits. SCHEDULE 6.4 includes a true and complete
--------------------
list of all Cox Franchises and all other material Cox Governmental Permits.
True and complete copies of the Cox Governmental Permits disclosed in SCHEDULE
6.4 (together with any and all amendments and any proposal or material
correspondence relating thereto) have been delivered to TCI. Except as set
forth on SCHEDULE 6.4, the Cox Franchises contain all of the commitments and
obligations of Cox to the applicable Governmental Authorities with respect to
the construction, ownership and operation of the Cox Systems. Except as set
forth on SCHEDULE 6.4, the Cox Governmental Permits are valid under all
applicable Legal Requirements according to their terms and are currently in full
force and effect. Except as listed in SCHEDULE 6.4, there is no legal action,
governmental proceeding or investigation pending or, to the knowledge of Cox,
threatened, to terminate, suspend or modify any Cox Governmental Permit and Cox
is, and to the knowledge of Cox, each other party thereto is, in compliance with
the terms and conditions of all the Cox Governmental Permits and with other
applicable requirements of all Governmental Authorities relating to the Cox
Governmental Permits, including all requirements for notification, filing,
reporting, posting and maintenance of logs and records, except for such
noncompliance which would not, individually or in the aggregate, have a System
Material Adverse Effect. Except as set forth in SCHEDULE 6.4, no person
(including any Governmental Authority) has as of the date hereof any right to
acquire any interest in any of the Cox Systems or the Cox Assets (including any
right of first refusal or similar right), other than the rights of condemnation
or eminent domain afforded by law or upon the termination of or default under
any
28
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Franchise. The Cox Franchises marked with an asterisk on SCHEDULE 6.4
constitute all of the communities where the local franchising or other
regulatory authority has certified to regulate rates charged to customers of the
Cox Systems pursuant to the Cable Act or where a customer service rate complaint
is pending before the FCC.
6.5. Real Property. SCHEDULE 6.5 contains a list of all Real Property
-------------
owned, leased or occupied by Cox with respect to the Cox Systems and all
easements or other interests in Real Property to which Cox is a party as of the
date hereof with respect to the Cox Systems, except for those easements and
other interests which if not held by Cox would not have a System Material
Adverse Effect. Cox has delivered to TCI true and complete copies of all deeds
and leases pertaining to such Real Property including Leases by Cox as lessor.
All Real Property leases, if any, that are leased from or to Affiliates of Cox
are identified as such on SCHEDULE 6.5. As to the Real Property which is
designated in SCHEDULE 6.5 as being owned in fee simple by Cox, except as set
forth in SCHEDULE 6.5, as of the date of this Agreement Cox has and as of the
Closing Date, will have, good and marketable title in fee simple to such
premises and all buildings, improvements and fixtures thereon, free and clear of
all Encumbrances, except for Permitted Encumbrances. As to the Real Property
which is designated in SCHEDULE 6.5 as being leased by Cox, except where the
failure of the representations made in this sentence to be true and correct
would not have a System Material Adverse Effect, as of the date of this
Agreement Cox is and as of the Closing Date, will be, the sole owner of the
leasehold interest in such Real Property, each such lease is valid and
subsisting and in full force and effect and, as of the date hereof, no other
party to such lease has given written notice to Cox of or made a written claim
with respect to any breach or default thereof and Cox is not aware of any fact
giving rise to a breach or default thereof. Subject to Permitted Encumbrances,
except as otherwise disclosed in SCHEDULE 6.5 and except where the failure of
the representations made in this sentence to be true and correct would not have
a System Material Adverse Effect, all Real Property listed on SCHEDULE 6.5
(including the improvements thereon) (i) is in reasonable operating condition
and repair (subject to normal wear and tear) consistent with its present use,
(ii) is available for immediate use in the conduct of the business or operations
of the Cox Systems, (iii) complies in all material respects with all applicable
building or zoning codes or restrictive covenants and the regulations of any
Governmental Authority having jurisdiction (iv) has full legal and practical
access to public roads or streets and has all utilities and services necessary
for the proper and lawful conduct and operation of the Cox Systems as presently
utilized. Except where the failure of the representations made in this sentence
to be true and correct would not have a System Material Adverse Effect, all
buildings, towers, guy wires and anchors, earth-receiving dishes and related
facilities used in the operations of the Cox Systems are located entirely on the
Cox Real Property, and together with all pole attachments, cable plant and cable
installations, equipment and facilities used in connection with the Cox Systems
are maintained, placed and located in accordance with the provisions of all
applicable Legal Requirements, deeds, leases, licenses, permits or other legally
enforceable arrangements. No condemnation of any of the Cox Real Property has
occurred, is pending or, to the knowledge of Cox, threatened. Except as set
forth on SCHEDULE 6.5, each Person upon or under or across whose property any of
the Cox Assets are located, maintained, installed or operated (other than drop
lines to customer dwellings) has granted to Cox such easements, licenses or
rights of way as are necessary for the location, maintenance, installation and
operation of such Cox Assets upon, over or under such property (the "Cox
Easements"), and subject to Permitted
29
<PAGE>
Encumbrances, as of the date of this Agreement Cox has and as of the Closing
Date will have, a right to use the Cox Easements except where the failure to
have any such Cox Easements would not, individually or in the aggregate, have a
System Material Adverse Effect.
6.6. Tangible Personal Property. Except with respect to leased
--------------------------
property, Cox has and as of the Closing Date Cox will have, good title to all
Cox Tangible Personal Property, and as of the Closing Date none of the Cox
Tangible Personal Property will be subject to any Encumbrance, except for
Permitted Encumbrances. The principal items of Cox Tangible Personal Property
as of the date of this Agreement are listed on SCHEDULE 6.6. Except as set forth
in SCHEDULE 6.6, the Cox Tangible Personal Property is in reasonable operating
condition and repair (subject to normal wear and tear), and is available for
immediate use in the conduct of the business or operations of the Cox Systems
except for that which is subject to routine maintenance or repair. All items of
cable plant, earth station and headend equipment included in the Cox Tangible
Personal Property (i) have been maintained in a manner consistent in all
material respects with generally accepted standards of good engineering practice
and (ii) will permit the Cox Systems to operate in all material respects in
accordance with the terms of the Cox Governmental Permits. The amount of the
Cox Systems' inventory is sufficient to permit the continued maintenance and
operation of the Cox Systems for at least a 30-day period.
6.7. Contracts. Except as described on SCHEDULE 6.7, Cox is not a
---------
party to any of the following that relate to the Cox Systems other than the
Excluded Assets: (i) pole attachment or line agreements and joint pole or line
agreements, (ii) leases of personal property for a term exceeding one year or
requiring payments of more than $50,000, (iii) agreements pursuant to which the
Cox Systems receive or provide advertising sales representation services, (iv)
agreements pursuant to which a Cox System has constructed or agreed to construct
for third parties an institutional network or otherwise provides to third
parties telecommunication services other than one-way video (v) agreements with
commercial customers or bulk-billed customers pursuant to which such customers
are charged in excess of $500 per month, (vi) multiple dwelling unit access
agreements, (vii) construction and development agreements (other than agreements
with installers and agreements where the remaining amount payable thereunder
will be less than $50,000 as of the Closing) or (viii) noncompetition agreements
or rights of first refusal that relate to the Cox Systems and are in favor of
Cox . SCHEDULE 6.7 contains a true and correct list of all other Cox Contracts
except for: (A) subscription agreements for cable television services provided
by the Cox Systems with residential customers that are not bulk-billed, (B) oral
employment contracts and miscellaneous service contracts terminable at will or
on no more than 30 days notice without penalty and (C) any other contract not
required to be listed pursuant to the first sentence of this Section 5.7 and not
involving either liabilities under such contract exceeding $50,000 per year or
any material nonmonetary obligation. Notwithstanding the foregoing, SCHEDULE
6.7 contains a separate and complete list of all retransmission consent
agreements relating to the Cox Systems, other than those excluded pursuant to
Section 4.2.5, showing the expiration date of each. Cox has delivered to TCI
true and complete copies of all written Cox Contracts listed in SCHEDULE 6.7.
All of the Cox Contracts listed in SCHEDULE 6.7 are valid and binding and, to
the knowledge of Cox, in full force and effect and legally enforceable in
accordance with their terms upon the other parties thereto. There is not under
any Cox Contract any default by Cox or, to the knowledge of Cox, any other
30
<PAGE>
party thereto or event which, after notice or lapse of time, or both, would
constitute such a default, except for such defaults which, individually or in
the aggregate, would not have a System Material Adverse Effect. To the knowledge
of Cox (x) there has not been any threatened cancellation of any Cox Contracts
(other than the cancellation of cable service by customers at normal and
customary levels), (y) there are no outstanding disputes thereunder and (z)
there is no basis for any claim of breach or default thereunder. Other than
where expressly noted in SCHEDULE 6.7, no Affiliate of Cox is a party to any of
the personal property leases disclosed on SCHEDULE 6.7.
6.8. Complete System. Except for those assets which are Cox Excluded
---------------
Assets, the Cox Assets comprise all of the assets (without material exception)
necessary to conduct the business and operations of the Cox Systems as presently
conducted.
6.9. Trademarks, Trade Names and Copyrights. SCHEDULE 6.9 contains a
--------------------------------------
true and correct list of all material trade names used by Cox in its operation
of the Cox Systems. Except as disclosed on SCHEDULE 6.9, Cox does not own or use
any patent, patent right, or copyright that is material to the operation of any
Cox System and Cox is not a party to any patent or copyright license or royalty
agreement with respect to its operation of any Cox System, except for software
licenses, licenses in respect of program material and obligations under the
Copyright Act of 1976 applicable to cable television systems generally. Except
as disclosed on SCHEDULE 6.9, Cox possesses or has the right to use all
Intangibles used in the operation and conduct of the business of the Cox Systems
without any conflicts with the rights of others that, individually or in the
aggregate, would have a System Material Adverse Effect. All of the Intangibles
are (a) either owned as of the date of this Agreement by Cox or will as of the
Closing Date be owned by Cox free and clear of all Encumbrances, except for
Permitted Encumbrances or (b) as of the date of this Agreement Cox has, and as
of the Closing Date will have the valid and enforceable right to use such
Intangibles. Cox is not aware that it is infringing upon or otherwise acting
adversely to any trademarks, trade names, copyrights, patents, patent
applications, know-how, methods or processes owned by any other person or
persons, and there is no claim or action pending, or to the knowledge of Cox,
threatened, with respect thereto, except for any infringement, claims or actions
that would not have a System Material Adverse Effect.
6.10. Information on Cox Systems.
--------------------------
6.10.1. SCHEDULE 6.10.1 lists for each of the Cox Systems as of
the date referenced in SCHEDULE 6.10.1 (i) the total number of miles of fully
completed and operational trunk and distribution cable, differentiating the
number of miles of aerial plant and the number of miles of underground plant;
(ii) the number of dwellings (as defined below) and commercial premises passed,
(iii) the total number of Equivalent Billing Units, the number of Equivalent
Billing Units that are residential and the number of Equivalent Billing Units
that are commercial or bulk-billed, (iv) the bandwidth capacity of each such
System specified in MHz, and (v) the number of channels activated throughout
each System (i.e., over 100% of the plant miles). SCHEDULE 6.10.1 also describes
- -
for each of the Cox Systems in which an upgrade is in progress, the number of
miles and percentage of the cable plant that has been upgraded, the bandwidth
and channel capacity of the upgraded plant and the anticipated rate of rebuild
or expansion for the next four quarters.
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6.10.2. As used in this Section 5.10, "dwellings" means a home
or other residential unit that can be legally serviced by a System by using no
more than 300 feet of drop cable.
6.10.3. The rates charged to customers for each class of
service (including equipment, installation and late fees) for each of the Cox
Systems as of the date of this Agreement, are set forth in SCHEDULE 6.10.3.
6.10.4. The Cox Systems duly and properly carry and deliver the
channels indicated in SCHEDULE 6.10.4. Cox has obtained all required FCC
clearances for the operation of the Cox Systems in all necessary aeronautical
frequency bands.
6.10.5. Except as disclosed in SCHEDULE 6.10.5 and other than
as expressly provided for in a Cox Contract disclosed in SCHEDULE 6.7, to the
knowledge of Cox as of the date of this Agreement, Cox does not have and as of
the Closing Date will not have, any obligation or understanding to pay third
parties for the right to access multiple dwelling units, commercial
establishments or subdivision developments, which obligation or understanding
will extend beyond the Closing Date.
6.10.6. Except as described in SCHEDULE 6.10.6 there are no
franchise, construction, fidelity, performance, or other bonds, surety
instruments, letters of credit or other similar items posted or delivered by Cox
in connection with the Cox Systems or the Cox Assets.
6.10.7. Except as described in SCHEDULE 6.10.7, the Cox Assets
do not include any multi-point distribution system, multi-channel multi-point
distribution system or satellite master antenna system that is not connected to
a Cox System headend.
6.11. Financial Statements.
--------------------
6.11.1. SCHEDULE 6.11 contains true and complete copies of
unaudited financial statements of Cox with respect to the Cox Systems containing
balance sheets and statements of income as, at and for the 12 months ended
December 31, 1993, 1994 and 1995 (collectively, the "Cox Financial Statements").
The Cox Financial Statements are prepared in accordance with GAAP consistently
applied, except for the absence of footnotes and except as specifically
described on Schedule 6.11. The Cox Financial Statements are in accordance with
the books and records of Cox and present fairly the operating income and
financial condition of the Cox Systems as at their respective dates and the
results of operations for the periods then ended. Other than as described in
SCHEDULE 6.11, none of the Cox Financial Statements understates the true costs
and expenses of conducting the business or operations of the Cox Systems or
inflates the revenue of the Cox Systems because of the provision of services or
the bearing of costs or expenses or the payment of fees by any other person or
for any other reason.
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6.12. Employee Benefit Plans.
----------------------
6.12.1. All Employee Plans and material Compensation
Arrangements currently providing benefits to employees, former employees or
independent contractors of the Cox Systems are listed and described in SCHEDULE
6.12, (the "Cox System Plans") and copies of any such written Cox System Plans
(and any related insurance policies, trusts, etc.) and written descriptions of
any unwritten Cox System Plans have been made available to TCI, along with
copies of any currently available employee handbooks and any other documents
used to describe such Cox System Plans to the covered individuals. Except as
disclosed in SCHEDULE 6.12, there is not now in effect or scheduled as of the
date of this Agreement, to become effective after the date of this Agreement,
any new Cox System Plan or any amendment to an existing Cox System Plan which
will materially affect the benefits of employees, former employees or
independent contractors of the Cox Systems.
6.12.2. Each Cox System Plan has been adopted, amended and
administered in compliance with its own terms and, where applicable, ERISA, the
Code, the Age Discrimination in Employment Act and any other applicable Legal
Requirements, except for such noncompliance which would not, individually or in
the aggregate, have a System Material Adverse Effect.
6.12.3. Except as disclosed in SCHEDULE 6.12, no
Multiemployer Plan provides or has ever provided benefits to any employee or
former employee of the Cox Systems.
6.12.4. Except as disclosed in Schedule 6.12, neither Cox nor
any entity under common control with Cox (under Sections 414(b),(c),(m) and (o)
of the Code) is aware of the existence of any governmental audit or examination
of any Cox System Plan or of any facts which would lead them to believe that any
such audit or examination is pending or threatened. There exists no action, suit
or claim (other than routine claims for benefits) with respect to any Cox System
Plan pending, or to the knowledge of Cox and each entity under common control
with Cox (under Sections 414(b), (c), (m) and (o) of the Code), threatened
against any Cox System Plan.
6.13. Labor Relations. SCHEDULE 6.13 lists the names, positions and
---------------
dates of hire of all persons employed by Cox as of the date of this Agreement
directly and principally in connection with the operation of the Cox Systems
(the "Cox Employees"). Cox has no written or oral contracts of employment with
any Cox Employee, other than (i) oral employment agreements terminable at will
without penalty or (ii) those listed in SCHEDULE 6.7. Cox in the operation of
the Cox Systems, has complied with all applicable Legal Requirements relating to
the employment of labor, including those related to wages, hours, collective
bargaining, occupational safety, discrimination and the payment of social
security and other payroll related taxes; except for such noncompliance which
would not, individually or in the aggregate, have a System Material Adverse
Effect. Except as described in SCHEDULE 6.13, Cox is not a party to any
collective bargaining agreement or other contract with any labor organization
regarding any of the Cox Employees, and Cox has not recognized or agreed to
recognize and is not required to recognize any union or other collective
bargaining representative of the Cox Employees. Except as set forth in SCHEDULE
6.13, no union or other collective bargaining representative claims to represent
or has been certified as representing any of the Cox Employees, nor has Cox
received any requests from any party for
33
<PAGE>
recognition as a representative of the Cox Employees for collective bargaining
purposes. Except as set forth in SCHEDULE 6.13, the Cox Employees are not
engaged in or subject to any organizing activity with respect to any labor
organization and, to the knowledge of Cox, no such activity is threatened.
Except as set forth in SCHEDULE 6.13, there is no strike, work slowdown,
picketing or any other labor disputes or controversies or proceedings pending or
threatened between Cox and any of the Cox Employees or any labor union or
collective bargaining representative claiming to represent any of the Cox
Employees. Cox does not have any employment agreement of any kind, oral or
written, express or implied, that would require the TCI Subsidiaries to employ
any Person after the Closing Date.
6.14. Tax Returns; Other Reports. Cox has duly and timely filed in
--------------------------
proper form all income, franchise, sales, use, property, excise, payroll and
other tax returns and all other reports (whether or not relating to taxes)
required to be filed with the appropriate Governmental Authority with respect to
the Systems. All taxes, fees and assessments of whatever nature due and payable
by Cox with respect to the Systems have been paid, except such amounts as are
being contested diligently and in good faith and are not in the aggregate
material. Except as set forth in SCHEDULE 6.14, there are no pending state or
local sales tax audits relating to the Cox Systems. Except as set forth in
SCHEDULE 6.14, Cox has not received any property, sales and use, or franchise
fee or tax audit notice or any other notice or assessment to the effect that
there is any unpaid interest, penalty or taxes due or claimed to be due from Cox
with respect to the Cox Assets or the business or operations of the Cox Systems.
6.15. Claims and Legal Actions. Except as set forth in SCHEDULE 6.15,
------------------------
as may affect the cable industry generally, and except for suits being defended
by Cox's insurance carriers for which there is adequate coverage, there is (i)
no legal action, counterclaim, suit, arbitration, (ii) to the knowledge of Cox,
no claim or governmental investigation or (iii) no other legal, administrative
or tax proceeding, nor any order, decree or judgment, in progress or pending, or
to the knowledge of Cox, threatened against or relating to the Cox Assets or
business or operations of the Cox Systems.
6.16. Environmental Matters.
---------------------
6.16.1. The Cox Real Property is in compliance with and, to the
knowledge of Cox, has previously been operated in compliance with, all
Environmental Laws, except for such noncompliance which, individually or in the
aggregate, would not have a System Material Adverse Effect. Except as set forth
in SCHEDULE 6.16 and except where the failure of the representations made in
this sentence to be true and correct would not have a System Material Adverse
Effect, Cox has not generated, released, stored, used, treated, handled,
discharged or disposed of any Hazardous Substances at, on, under, in or about,
or in any other manner affecting, any Cox Real Property, transported any
Hazardous Substances to or from any Cox Real Property or discharged any
Hazardous Substances from any Cox Real Property into any body of water, directly
or indirectly, or undertaken or caused to be undertaken any other activities
relating to the Cox Real Property, which would support a claim or cause of
action under any Environmental Law, and, to the knowledge of Cox, no other
present or previous owner, tenant, occupant or user of any Cox Real
34
<PAGE>
Property or any other Person has committed or suffered any of the foregoing.
Except where the failure of the representations made in this sentence to be true
and correct would not have a System Material Adverse Effect, to the knowledge of
Cox, no release of Hazardous Substances outside the Cox Real Property has
entered or threatens to enter any Cox Real Property, nor is there any pending or
threatened claim based on Environmental Laws that arises from any condition of
the land surrounding any Cox Real Property. No claim or investigation based on
Environmental Laws which relates to any Cox Real Property or any operations or
conditions on it (i) has been asserted or conducted in the past or is currently
pending against or with respect to Cox or, to the knowledge of Cox, any other
Person or (ii) to the knowledge of Cox, is threatened or contemplated.
6.16.2. Except as set forth in SCHEDULE 6.16 and except where
the failure of the representations made in this sentence to be true and correct
would not have a System Material Adverse Effect, to the knowledge of Cox, (i) no
underground storage tanks are currently or have been located on any Cox Real
Property, (ii) no Cox Real Property has been used at any time as a gasoline
service station or any other facility for storing, pumping, dispensing or
producing gasoline or any other petroleum products or wastes, (iii) no building
or other structure on any Cox Real Property contains friable asbestos, and (iv)
there are no incinerators or cesspools on the Cox Real Property and all domestic
waste is discharged into a public sanitary sewer system.
6.16.3. Cox has provided TCI with complete and correct copies of
(i) all studies, reports, surveys or other materials in the possession of Cox
relating to the presence or alleged presence of Hazardous Substances at, on or
affecting the Cox Real Property, (ii) all notices or other materials in the
possession of Cox that were received during the past two years from any
Governmental Authority having the power to administer or enforce any
Environmental Laws relating to current or past ownership, use or operation of
the Cox Real Property or activities at the Cox Real Property and (iii) all
materials in the possession of Cox relating to any claim, allegation or action
by any private third party under any Environmental Law.
6.17. Compliance with Laws. Cox has complied and is in compliance
--------------------
with all Legal Requirements applicable to the Cox Systems in the operation of
the business and the ownership of the Cox Assets, except for such noncompliance
which would not, individually or in the aggregate, have a System Material
Adverse Effect. Except as set forth in SCHEDULE 6.17, Cox has not received
notice claiming a violation by Cox of any Legal Requirement applicable to the
Cox Systems as it is currently conducted and to the knowledge of Cox, there is
no basis for any claim that such a violation exists. The representations and
warranties in this SECTION 6.17 do not apply to compliance with, or notices with
respect to, the Communications Act and the rules and regulations of the FCC, as
to which the representations and warranties in SECTION 6.19 will apply.
6.18. Conduct of Business in Ordinary Course. Except as set forth on
--------------------------------------
SCHEDULE 6.18, since December 31, 1995, (i) Cox has conducted the business and
operations of the Cox Systems only in the ordinary and usual course
substantially in the same manner as previously conducted, (ii) the liabilities
incurred or accrued in the ordinary course of business do not, individually or
in the aggregate, have a System Material Adverse Effect, and (iii) Cox has not
suffered any changes, events or conditions which have had a System Material
Adverse Effect.
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6.19. FCC and Copyright Compliance.
----------------------------
6.19.1. The operation of each of the Cox Systems has been, and
is, in compliance with the Communications Act and the rules and regulations of
the FCC, except for such noncompliance which would not, individually or in the
aggregate, have a System Material Adverse Effect and except for Legal
Requirements with respect to rates charged to customers as to which the
representations set forth in SECTION 6.19.2 shall apply. Cox has made all
material filings required to be made with the FCC (including cable television
registration statements, annual reports and aeronautical frequency usage
notices) and has provided all material notices to customers required under the
Communications Act and the FCC's rules and regulations. Cox is and since 1988
has been certified as in compliance with, the FCC's equal employment opportunity
rules and the Cox Systems are in material compliance with all signal leakage
criteria prescribed by the FCC. With respect to the Cox Systems, Cox has
complied in all material respects with the specifications set forth in Part 76,
Subpart K of the rules and regulations of the FCC and other provisions of the
Communications Act or the rules and regulations of the FCC pertaining to signal
leakage, to utility pole make ready and to grounding and bonding of cable
television systems (in each case as the same is currently in effect).
6.19.2. Cox has complied in all material respects with the must
carry and retransmission consent provisions of the Cable Act and the FCC rules
and regulations promulgated thereunder as such provisions relate to the Cox
Systems. Except as set forth in SCHEDULE 6.19, no written notices or demands
have been received from the FCC, from any television station, or from any other
Person, station, Governmental Authority or unit challenging the right of the Cox
Systems to carry any signal or deliver the same. Except as set forth on SCHEDULE
6.19, Cox has used commercially reasonable efforts to establish rates charged to
customers, effective since September 1, 1993, that would be allowable under
rules and regulations promulgated by the FCC under the Cable Act, and any
authoritative interpretation thereof, whether or not such rates were subject to
regulation by any Governmental Authority, including the local franchising
authority and/or the FCC, and such rates as computed under the FCC's rules and
regulations are permitted rates except as set forth in SCHEDULE 6.19. Cox has
delivered to TCI complete and correct copies of all FCC 393 Forms and FCC 1200
Series Forms provided to local franchising authorities or the FCC with respect
to the Cox Systems and copies of all material correspondence with any
Governmental Authority relating to rate regulation generally or specific rates
charged to customers with respect to the Cox Systems, including, without
limitation, copies of any complaints and responses filed with the FCC with
respect to any rates charged to customers of the Cox Systems and any other
documentation supporting an exemption from the rate regulation provisions of the
Cable Act claimed with respect to any of the Cox Systems. Cox makes no
representation or warranty with respect to the effect of the cable television
industry-wide dispute concerning music licensing fees. Except as set forth in
SCHEDULE 6.19, Cox has received no notice from any Governmental Authority with
respect to an intention to enforce customer service standards pursuant to the
Cable Act with respect to the Cox Systems and Cox has not agreed with any
Governmental Authority to establish customer service standards for the Cox
Systems that exceed the standards in the Cable Act. Cox has made no Cost of
Service Election with respect to any of the Cox Systems.
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6.19.3. Cox has deposited on a timely basis with the U.S.
Copyright Office all statements of account and other documents and instruments,
and paid all royalties, supplemental royalties, fees and other sums to the U.S.
Copyright Office under the Copyright Act of 1976, as amended (the "Copyright
Act"), with respect to the business and operations of the Cox Systems as are
required to obtain, hold and maintain the compulsory license for cable
television systems prescribed in Section 111 of the Copyright Act. Cox and the
Cox Systems are in compliance with the Copyright Act and the rules and
regulations of the U.S. Copyright Office, except as to potential copyright
liability arising from the performance, exhibition or carriage of any music on
the Cox Systems, and except for such noncompliance which would not, individually
or in the aggregate, have a System Material Adverse Effect. Except as set forth
in SCHEDULE 6.19, to the knowledge of Cox, there is no inquiry, claim, action or
demand pending before the U.S. Copyright Office or from any other party which
questions the copyright filings or payments made by Cox with respect to the Cox
Systems.
6.19.4. All necessary FAA approvals have been obtained with
respect to the height and location of towers used in connection with the
operation of the Cox Systems and are listed in SCHEDULE 6.19. The towers are
being operated in compliance in all material respects with applicable FCC and
FAA rules.
6.19.5. A valid request for renewal has been timely filed
pursuant to Section 626(a) of the Cable Act with the proper Governmental
Authority with respect to any Cox Franchise expiring within 30 months of the
date of this Agreement.
6.20. Accounts Receivable. All of the accounts receivable which are
-------------------
the subject of the adjustments provided in Sections 3.2.4 and 3.2.5 have arisen
from bona fide transactions in the ordinary course of Cox's business consistent
with past practice.
6.21. Competitive Activity. To the knowledge of Cox, as of the date
--------------------
of this Agreement, except as set forth on SCHEDULE 6.21, (i) there are no third
parties (as to TCI and Cox) operating cable television systems or overbuilds in
the Cox Service Areas, and (ii) no Franchise or other operating authority for a
cable television system has been granted to any third party (as to Cox and TCI)
by the appropriate Governmental Authority in the Cox Service Areas, and, to the
knowledge of Cox, no third party (as to Cox and TCI) is seeking such a Franchise
or other operating authority. To the knowledge of Cox, no third party (as to Cox
and TCI) intends to construct or operate any of the foregoing or is seeking to
construct or operate any of the foregoing.
6.22. Cure. For all purposes under this Agreement, the existence or
----
occurrence of any events or circumstances that constitute or cause a breach of a
representation or warranty of Cox made in this Agreement (including, without
limitation, the schedules hereto) on the date such representation or warranty is
made shall not constitute a breach of such representation or warranty if such
event or circumstance is cured within 30 days of its existence or occurrence,
but in no event later than 10 days prior to the date scheduled for Closing..
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6.23. Additional System(s). The representations and warranties made
--------------------
by Cox in this Article 6 relate to Cox and to the Cox Systems only and Cox does
not make and shall not be deemed to have made any representations or warranties
with respect to the Additional System(s).
7. Pre-Closing Covenants.
---------------------
7.1. Access to Premises and Records. Between the date of execution
------------------------------
and delivery of this Agreement and the Closing Date, each of TCI and Cox will
provide to the other and its representatives full access at reasonable times to
all the premises, employees and books and records of the business and operations
of the Systems and to all the Assets and will furnish to the other and its
representatives all information regarding the business and operations of the
Systems, including without limitation, the personnel records of the employees
engaged in the operations of the Systems and the Assets as the other may from
time to time reasonably request. Notwithstanding any investigation that TCI or
Cox may conduct of the business and operations of the Systems and the Assets to
be transferred to it, each of TCI and Cox, may fully rely on the other's
representations, warranties, covenants and indemnities, which will not be waived
or affected by or as a result of such investigation. For a period of three years
after the Closing, upon prior notice and during normal business hours, each
party will provide the other party and its successors or permitted assigns
reasonable assistance with and access to all of the books, records, reports,
Contracts and other information from files and records transferred from such
party at the Closing, for purposes of examining, preparing extracts and
photocopying such materials.
7.2. Continuity and Maintenance of Operations. Except as disclosed
----------------------------------------
in SCHEDULE 7.2A (TCI) and SCHEDULE 7.2B (Cox), or as Transferee may otherwise
agree in writing, during the period from the date of this Agreement until the
Closing:
7.2.1. Each TCI Subsidiary and Cox will continue to operate the
Systems owned by it in the ordinary course consistent with past practices
(including taking budgeted or planned rate increases, continuing to make
budgeted marketing, advertising and promotional expenditures with respect to the
Systems and including completing line extensions, placing conduit or cable in
new developments, fulfilling installation requests and continuing work on
existing construction projects) and will use its commercially reasonable efforts
to keep available the services of its employees employed in connection with the
Systems and to preserve any beneficial business relationships with franchising
authorities, customers, suppliers and others having business dealings with it
relating to the Systems. Notwithstanding the foregoing, once a TCI Subsidiary
or Cox, as applicable, has expended for the purposes described in Section 7.20
the amount set forth in SCHEDULE 3.2.6 for a System, such party shall have no
obligation to complete line extensions, place conduit or cable in new
developments, or fulfill installation requests if the applicable project
involves (A) passing on average fewer than 20 residential dwellings, multiple
dwelling units and/or commercial establishments per mile or (B) the expenditure
of more than $50,000, unless requested or consented to by Transferee of such
System pursuant to Section 7.20. Without limiting the generality of the
foregoing, each TCI Subsidiary and Cox will maintain (i) the Assets of its
Systems in reasonable operating condition and repair, (ii) insurance as in
effect on the date of this Agreement, (iii) inventories of equipment and
supplies at levels sufficient to support operations for 30 days, and (iv)
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all of its business books, records and files in the ordinary course of business
in accordance with past practices. Each TCI Subsidiary and Cox will not itself,
and will not permit any of its officers, directors, shareholders, agents or
employees or Affiliates to, pay any of its customer accounts receivable (other
than for their own residences) prior to the Closing Date. Each TCI Subsidiary
and Cox will continue to implement its procedures for disconnection and
discontinuance of service to customers whose accounts are delinquent in
accordance with those procedures in effect on the date of this Agreement.
7.2.2. Except to the extent required by law (of which Transferor
shall give notice to Transferee) after the date of this Agreement, each TCI
Subsidiary and Cox will not, without the prior written consent of Transferee
(which will not be unreasonably withheld or delayed): (i) change customer rates
for any tier of service or charges for remotes or installation except to the
extent required under the Cable Act or any other Legal Requirement, provided,
however, that if it changes such rates in order to so comply, it will provide
Transferee with copies of any FCC forms used to determine the new rates; (ii)
make channel additions, channel substitutions, change the channel lineups or
implement any retiering or repackaging of cable television programming offered
by any of its Systems; (iii) make any Cost of Service Election or filing based
on the "effective competition" provisions of the Cable Act with respect to any
of its Systems or change billing, collection, installation, disconnection,
marketing or promotional practices; (iv) sell, transfer, lease, assign or
otherwise dispose of any of the Assets (except for assets consumed in the
ordinary course of business or in conjunction with the acquisition of
replacement property of equivalent kind and value); (v) create, assume or permit
to exist any Encumbrance on any Asset, except for Permitted Encumbrances; (vi)
amend, terminate or renew (other than on the same or substantially similar terms
and conditions) any of the Governmental Permits, Contracts, Real Property
interests or any other contract or agreement (other than those constituting
Excluded Assets) which affects or is related to its Systems or the business;
(vii) enter into any contract or commitment (including any renewal of an
existing Governmental Permit, Contract or Real Property interest other than on
the same terms and conditions) or incur any indebtedness or other liability or
obligation of any kind relating to the Systems or the Business which will be an
Assumed Liability of Transferee involving an expenditure in excess of $50,000;
or (viii) engage in any selling or marketing campaigns or promotional activities
not in the ordinary course of business, consistent with past practice; (ix) take
or omit to take any commercially reasonable action that would cause it to be in
breach of any of its representations or warranties in this Agreement; (x) make
any material increase in compensation payable or to become payable to its
employees employed at the Systems or make any material change in personnel
policies; (xi) enter into any agreement with or commitment to any competitive
access provider with respect to the Systems, or (xii) enter into any proposed
resolution with the FCC regarding or relating to rates charged or chargeable for
cable television services on the Systems.
7.2.3. No TCI Subsidiary or Cox shall, without the prior written
consent of Transferee (which shall not be unreasonably withheld or delayed)
enter into any new contract or amendment or renewal of any existing contract
with any broadcaster concerning retransmission consents relating to the Systems;
provided, however, that Transferee's consent shall not be required for
retransmission consent agreements that (i) Transferee will not be obligated or
required for
39
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operational reasons to assume at Closing, or (ii) are on substantially the same
terms as the expiring retransmission consent agreement being replaced or
renewed.
7.2.4. For purposes of this Section 7.2, in each case where
Transferor requests Transferee's consent for a proposed action, Transferee shall
respond as soon as practicable, but in any event within five Business Days of
Transferee's receipt of the request for consent; provided however if the action
proposed by Transferor requiring Transferee's consent requires a quicker
decision by Transferee, then Transferee shall use every effort to reach a
decision on the proposed action within the time frame required for such action.
7.3. Employee Benefit Matters.
------------------------
7.3.1. Transferee has no obligation to employ any of
Transferor's employees employed at the Systems. TCI or Cox, as applicable, in
its capacity as Transferor agrees that it will provide Transferee with notice at
least 90 days before the Closing Date of any employees of the Systems that
Transferor intends to retain and reassign on or prior to Closing. TCI or Cox, as
applicable, in its capacity as Transferee agrees that it will provide Transferor
with notice of which employees of the Systems Transferee intends to hire at
least 75 days before the Closing Date .
7.3.2. As of the Closing Date, TCI or Cox, as applicable, in its
capacity as Transferor shall terminate the employment of all employees of
Transferor engaged in the operations of the Systems. TCI or Cox, as applicable,
in its capacity as Transferor shall be responsible for and shall cause to be
discharged and satisfied in full all amounts owed to any of its employees,
including without limitation, any wages, salaries, sick pay, accrued vacation in
excess of the amount Transferee assumes pursuant to Section 7.3.4 below,
payments under any employment, incentive, compensation or bonus agreements,
benefits under any Employee Plan or Compensation Arrangement or any other
payments on account of termination. TCI or Cox, as applicable, in its capacity
as Transferor shall assume full responsibility and liability for offering and
providing "continuation coverage" to any "qualified beneficiary" who is covered
by a "group health plan" sponsored or contributed to by Transferor and who has
experienced a "qualifying event" or is receiving "continuation coverage" on or
prior to the Closing Date. "Continuation coverage," "qualified beneficiary,"
"qualifying event" and "group health plan" all shall have the meanings given
such terms under Section 4980B of the Code and Section 601 et seq. of ERISA.
-- ---
7.3.3. TCI or Cox, as applicable, in its capacity as Transferee
shall offer health plan coverage, on terms and conditions determined by
Transferee, to all of the full-time employees of the Systems which Transferee
elects to hire as of the Closing Date. For purposes of providing such coverage,
TCI or Cox, as applicable, in its capacity as Transferee shall waive all
preexisting condition limitations for all employees of the Systems, which are
covered by the Transferor's health care plan as of the Closing Date (other than
known preexisting conditions which were excluded by Transferor's health care
plan) and shall provide such health care coverage effective as of the Closing
Date without the application of any eligibility period for coverage. In
addition, TCI or Cox, as applicable, in its capacity as Transferee shall credit
all payments made by employees of Transferor toward deductible, co-payment and
out-of-pocket limits under Transferor's health care
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plans for the plan year which includes the Closing Date as if such payments had
been made for similar purposes under Transferee's health care plans during the
plan year which includes the Closing Date, with respect to employees of the
Systems employed by Transferee as of the Closing Date.
7.3.4 For each employee of Transferor whom Transferee hires on
the Closing Date, TCI, L.P. or Cox, as applicable, in its capacity as Transferee
shall (i) provide to such employee the same amount of paid vacation as that
employee had accrued but not taken as an employee of Transferor as of the
Closing Date; provided, that the amount of accrued vacation provided to such
employee by Transferee under this Section 7.3.4 shall be limited to the maximum
amount of vacation permitted to be accrued by employees of the Transferee in
accordance with Transferee's standard practices; (ii) permit such employee to
participate in Transferee's employee benefit plans to the same extent as
similarly situated employees of Transferee and their dependants; and (iii) give
such employee credit for his or her past service with Transferor as of the
Closing Date (including past service with any prior owner or operator of
Transferor's Systems to the extent data with respect to such past service credit
is provided to Transferee within a reasonably practicable period of time after
the Closing) for purposes of eligibility and vesting, but not for benefit
accrual purposes, under Transferee's Employee Plans and Compensation
Arrangements in accordance with Transferee's standard practices; provided, that
no past service credits shall be required with respect to the Transferee's post-
retirement medical benefits.
7.3.5 If the parties mutually agree to an asset transfer, TCI or
Cox, as applicable, in its capacity as Transferor shall cooperate with
Transferee in arranging transfers from Transferor's 401(k) plan to Transferee's
401(k) plan with respect to those employees of the Systems who become employed
by Transferee following the Closing in accordance with this Section 7.3.
7.3.6 If TCI or Cox, as applicable, in its capacity as
Transferee discharges within 90 days of Closing any former employees of
Transferor hired by Transferee at Closing, and such employees would have been
entitled to severance payments pursuant to Transferor's severance benefits plan
if such employees had been discharged without cause by Transferor in accordance
with Section 7.3.2 and not been hired by Transferee as of Closing, then TCI or
Cox, as applicable, in its capacity as Transferee shall pay severance benefits
to such employees in accordance with Transferor's severance benefit plan listed
on SCHEDULE 5.12 (TCI SYSTEMS) OR SCHEDULE 6.12 (COX SYSTEMS) to the extent such
plan would have paid severance to any such employees if they had not been hired
by Transferee at Closing.
7.3.7 This Section 7.3 shall operate exclusively for the benefit
of Transferor and Transferee and not for the benefit of any other person
including, without limitation, any current, former or retired employee of
Transferor or Transferee.
7.4 Broker's Fees. Each party hereto represents and warrants to the
-------------
other that neither it nor any Person acting on its behalf has incurred any
liability for any finders' or brokers' fees or commissions in connection with
the transaction contemplated by this Agreement, except for
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Daniels & Associates whose fee shall be borne equally by TCI on the one hand and
by Cox on the other. Each party agrees to indemnify and hold harmless the other
against any fee, commission, loss or expense arising out of any claim by any
other broker or finder employed or alleged to have been employed by it.
7.5 Required Consents and Estoppel Certificates.
-------------------------------------------
7.5.1 TCI or Cox, as applicable, in its capacity as Transferor
will use its commercially reasonable efforts to obtain, as soon as possible and
at its expense, all the Required Consents, in form and substance reasonably
satisfactory to Transferee; provided that Transferor's commercially reasonable
efforts shall not require Transferor to make any payments to any person from
whom such Required Consents are sought (other than normal or customary filing
fees, administrative costs or professional fees and expenses related to
obtaining such consents). TCI or Cox, as applicable, in its capacity as
Transferee will cooperate with Transferor to obtain all Required Consents, but
Transferee will not be required to (i) make any payment to any Person from whom
such Required Consent is sought, or (ii) accept any changes in, or the
imposition of any adverse condition to, any Contract or Governmental Permit as a
condition to obtaining any Required Consent other than changes to any Contract
or Governmental Permit that do not impose any (A) monetary obligations (except
for increased Franchise fee payments to the maximum extent permitted by
applicable law) or (B) material nonmonetary obligations upon Transferee or (C)
significant expansion of the rights of the other contracting party or the
franchising authority from whom such consent is sought. Transferee agrees that
it will not, without the prior written consent of Transferor (which may be
withheld at Transferor's sole discretion), seek amendments or modifications to
existing Franchises or Contracts. Transferee will, at Transferor's request,
promptly furnish Transferor with copies of such documents and information with
respect to Transferee, including financial information and information relating
to the cable and other operations of Transferee and any of its Affiliates or
related companies, as Transferor may reasonably request in connection with the
obtaining of any consents to the transactions contemplated by this Agreement or
as may be reasonably requested by any Person in connection with any consent or
approval of such Person to the transactions contemplated by this Agreement.
Transferor also will use its commercially reasonable efforts to obtain, at its
expense, a nondisturbance agreement (in a form mutually agreeable to Transferor
and Transferee) from the lessor's lenders for each Real Property leasehold
interest indicated with an asterisk on SCHEDULE 5.5 (where Transferor is TCI)
and SCHEDULE 6.5 (where Transferor is Cox), and such estoppel certificates or
similar documents from lessors who are parties to Contracts as Transferee may
reasonably request or which are necessary to effect a transfer.
7.5.2 Notwithstanding the foregoing, TCI or Cox, as applicable,
in its capacity as Transferor will have no further obligation to obtain Required
Consents: (i) with respect to license agreements relating to pole attachments
where the licensing party will not, after Transferor's exercise of commercially
reasonable efforts, consent to an assignment of such license agreement but
requires that Transferee enter into a new agreement with such licensing
authority, in which case Transferee shall use its reasonable efforts to enter
into such agreement as soon as possible and Transferor will cooperate with and
assist Transferee in obtaining such agreements; provided however that
Transferee's commercially reasonable efforts shall not require Transferee to
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take any action of the type that Transferor is not required to take pursuant to
Subsection 7.5.1 hereof; and (ii) for any business radio license which
Transferor reasonably expects can be obtained within 120 days after the Closing
and so long as a temporary authorization is available to Transferee under FCC
rules with respect thereto.
7.5.3 As soon as practicable after the date of this Agreement,
but in any event not later than 45 days after the date of this Agreement the
parties will each cooperate with the other to assist in completing and will
complete and file, or cause to be completed and filed with the appropriate
Governmental Authority, an FCC Form 394 with respect to each System as to which
such Form 394 is required.
7.5.4. TCI or Cox, as applicable, in its capacity as Transferee
shall take all commercially reasonable action, and execute and deliver all
reasonably necessary documents to ensure that on the Closing Date Transferee has
delivered such bonds, letters of credit, indemnity agreements and similar
instruments in such amounts and in favor of such franchisors or other persons
requiring the same in connection with the Franchises and Contracts being assumed
by Transferee at Closing.
7.6 Title Commitments and Surveys. Within 60 days after the
-----------------------------
execution of this Agreement, TCI or Cox, as applicable, in its capacity as
Transferee will order (i) commitments for owner's title insurance policies on
all Real Property owned by Transferor, (ii) commitments for lessee's title
insurance policies for all Real Property leased by Transferor which is used for
headend or tower sites and (c) an ALTA survey on each parcel of owned Real
Property for which a title insurance policy is to be obtained. The title
commitment will evidence a commitment to issue an ALTA title insurance policy
from a nationally recognized title insurance company such as First American
Title Company or Chicago Title Insurance Company, insuring good, marketable and
indefeasible fee simple (or leasehold, if applicable) title to each parcel of
the Real Property contemplated above for such amount as Transferee directs and
will contain no exceptions except for items which in Transferee's reasonable
opinion do not adversely affect (other than in an immaterial way as to any
individual parcel) the good, marketable and indefeasible title to or
Transferee's access or quiet use or enjoyment of such Real Property in the
manner such Real Property is presently used or in the normal conduct of the
Business. At the Closing, TCI or Cox, as applicable, in its capacity as
Transferor will cause Transferee to receive, at Transferor's expense, title
commitments with respect to owned Real Property redated to the date and time of
Closing.
7.7 Environmental Investigations.
----------------------------
7.7.1 As soon as practicable after the date of this Agreement
(but in no event more than 90 days after the date of this Agreement), TCI and
Cox, as applicable, in its capacity as Transferee will obtain a Phase I
environmental audit of the Real Property (which shall include a limited asbestos
survey) to be transferred to Transferee at Closing, or on such parcels of the
Real Property as Transferee may determine. Transferee shall engage a nationally
known environmental auditing company to perform the aforesaid audit. Transferor
will comply with any reasonable request for information made by Transferee or
its agents in connection with any such investigation
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and shall afford Transferee and its agents access to all operations of the
Systems, including without limitation all areas of the Real Property, at
reasonable times and in a reasonable manner in connection with any such
investigation.
7.7.2 In the event that as a result of any of the environmental
investigations, a nationally known environmental auditing company determines
that remedial action is required by law, Transferee shall promptly notify
Transferor. If Transferee's environmental expert determines that remedial
action is required, Transferor shall have the right to engage a nationally known
environmental auditing company to provide a second opinion, in which case the
parties agree to use an average of the two estimates for purposes of this
Section 7.7.2. Subsequent to the determination of the estimates of the
remediation costs and subject to Transferee's prior written consent (which
consent shall not be unreasonably withheld), Transferor may acquire or lease (as
applicable) a substantially similar parcel of real property to substitute for
the Real Property that is subject to the environmental problem, in which case
(A) Transferor shall bear all costs and expenses (direct, indirect and
consequential) in any way related to the identification and acquisition of such
real property, and the construction and relocation of System plant and
facilities resulting from such substitution of the Real Property, and (B) the
Real Property with the environmental problem shall be deemed an Excluded Asset.
In the event Transferor does not promptly propose such a substitution or
Transferor and Transferee do not agree on any material aspect of a proposed
substitution, then the parties shall proceed as follows: (i) Transferor shall
cause such remedial action to be performed in accordance with all applicable
Environmental Laws, if the aggregate cost thereof is $1,000,000 or less for a
single parcel of Real Property and $10,000,000 or less for all parcels of Real
Property; and (ii) if the cost of such remedial action exceeds $1,000,000 for a
single parcel of Real Property or $10,000,000 for all parcels of Real Property
and Transferor does not elect to cause remedial action to be performed in
accordance with applicable Environmental Laws, Transferee may elect either to
terminate this Agreement, or to accept a transfer of the Assets without such
remedial action having been taken, subject to an adjustment to the Cash
Consideration paid at Closing equal to the required remediation costs but in no
event more than $1,000,000 for each parcel of Real Property for which the
estimated remediation exceeds $1,000,000 and an aggregate of $10,000,000. If
Transferor remediates or Transferee accepts the transfer of the Assets subject
to an adjustment in Cash Consideration pursuant to clause (ii), then Transferee
shall not be entitled to rely for any purpose on the representations and
warranties of Transferor or to seek indemnification to the extent they relate to
the specific environmental problem requiring remediation and the specific
property subject to the remediation requirement.
7.8 HSR Notification. As soon as practicable, but not later than 30
----------------
days after the date of this Agreement, each party will complete and file, or
cause to be completed and filed, any notification and report required to be
filed under the HSR Act with respect to the transactions contemplated hereby.
Each of the parties will cooperate to prevent inconsistencies between their
respective filings and will furnish to each other such necessary information and
reasonable assistance as the other may reasonably request in connection with its
preparation of necessary filings or submissions under the HSR Act. The parties
shall use commercially reasonable efforts to respond as promptly as reasonably
practicable to any inquiries received from the Federal Trade Commission (the
"FTC") and the Antitrust Division of the Department of Justice (the "Antitrust
Division") for
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additional information or documentation and to respond as promptly as reasonably
practicable to all inquiries and requests received from any other Governmental
Authority in connection with antitrust matters. The parties shall use their
respective commercially reasonable efforts to overcome any objections which may
be raised by the FTC, the Antitrust Division or any other Governmental Authority
having jurisdiction over antitrust matters. Notwithstanding anything to the
contrary in this Agreement, if either party, in its reasonable business
judgment, considers the imposition of a condition upon the transactions by a
governmental agency to be materially adverse to such party, such party may
terminate this Agreement. Each Transferee will pay the filing fees payable by
such Transferee in connection with Transferee's filing under the HSR Act.
7.9 No Shop. Neither TCI nor Cox nor any of their respective
-------
Affiliates or any agent or representative of any of them will, during the period
commencing on the date of this Agreement and ending with the earlier to occur of
the Closing or the termination of this Agreement, directly or indirectly (i)
solicit or initiate the submission of proposals or offers from any Person for,
(ii) participate in any discussions pertaining to or (iii) furnish any
information to any Person other than the other party hereto relating to, any
direct or indirect acquisition or purchase of all or any portion of the Assets,
the Systems or its stock.
7.10. Notification of Certain Matters. TCI or Cox, as applicable, in
-------------------------------
its capacity as Transferor will promptly notify Transferee of any fact, event,
circumstance or action (i) which, if known on the date of this Agreement, would
have been required to be disclosed to Transferee pursuant to this Agreement or
(ii) the existence or occurrence of which would cause any of Transferor's
representations or warranties under this Agreement not to be correct and
complete, including, without limitation, any fact, event, circumstance or action
that would have been required to be disclosed on SCHEDULE 5.13 (TCI) or 6.13
(Cox).
7.11. Risk of Loss; Condemnation.
--------------------------
7.11.1. Transferor will bear the risk of any loss or damage to
the Assets resulting from fire, theft or other casualty (except reasonable wear
and tear) at all times prior to the Closing. If any such loss or damage is so
substantial as to prevent normal operation of any material portion of any of the
Systems or the replacement or restoration of the lost or damaged property prior
to Closing, Transferor will immediately notify Transferee of that fact and
Transferee, at any time within 10 days after receipt of such notice, may elect
by written notice to Transferor either to (i) waive such defect and proceed
toward consummation of the acquisition of the Assets in accordance with the
terms of this Agreement or (ii) terminate this Agreement. If Transferee elects
so to terminate this Agreement, Transferee and Transferor will be discharged of
any and all obligations hereunder. If Transferee elects to consummate the
transactions contemplated by this Agreement notwithstanding such loss or damage
and does so, all insurance proceeds payable as a result of the occurrence of the
event resulting in such loss or damage will be delivered by Transferor to
Transferee, or the rights to such proceeds will be assigned by Transferor to
Transferee if not yet paid over to Transferor, and Transferor will pay to
Transferee an amount equal to the difference between the amount of such
insurance proceeds and the full replacement cost of the damaged or lost Assets
as reasonably agreed to by the parties.
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7.11.2. If, prior to the Closing, all or any part of or interest
in the Assets is taken or condemned as a result of the exercise of the power of
eminent domain, or if a Governmental Authority having such power informs
Transferor or Transferee that it intends to condemn all or any part of or
interest in the Assets and such taking is so substantial as to prevent normal
operation of any material portion of any of the Systems (such event being
called, in either case, a "Taking"), then subject to Transferee's prior written
consent (which consent shall not be unreasonably withheld), Transferor may
acquire or lease (as applicable) substantially similar property to substitute
for the Assets that are subject to the Taking, in which case (A) Transferor
shall bear all costs and expenses (direct, indirect and consequential) in any
way related to the identification and acquisition of such Assets, and any
construction and/or relocation of System plant and facilities resulting from the
substitution of the property. If Transferor does not promptly propose such a
substitution, or Transferor and Transferee do not reach agreement on any
material aspect of such substitution of the Assets subject to a Taking then (Y)
Transferee may terminate this Agreement or (Z) if Transferee does not elect to
terminate this Agreement, then (i) Transferee will have the sole right, in the
name of Transferor, if Transferee so elects, to negotiate for, claim, contest
and receive all damages with respect to the Taking, (ii) Transferor will be
relieved of its obligation to convey to Transferee the Assets or interests that
are the subject of the Taking, (iii) at the Closing, Transferor will assign to
Transferee all of Transferor's rights to all damages payable with respect to
such Taking and will pay to Transferee all damages previously paid to Transferor
with respect to the Taking and (iv) following the Closing, Transferor will give
Transferee such further assurances of such rights and assignment with respect to
the taking as Transferee may from time to time reasonably request.
7.12. Lien and Judgment Searches. TCI or Cox, as applicable, in its
--------------------------
capacity as Transferor will deliver to Transferee, not more than 60 days after
the date of this Agreement, the results of a lien search conducted by a
professional search company of records in the offices of the secretaries of
state in each state and county clerks in each county where there exist tangible
Assets, and in the state and county where Transferor's principal offices are
located, including copies of all financing statements or similar notices or
filings (and any continuation statements) discovered by such search company.
7.13. Transfer Taxes, Fees and Expenses. TCI or Cox, as applicable, in
---------------------------------
its capacity as Transferor will be responsible for the payment of any federal,
state or local sales, income, use, transfer, excise, documentary or license
taxes or fees or any other charge (including filing fees) imposed by any
Governmental Authority with respect to the transfer of its Assets pursuant to
this Agreement. Except as otherwise provided in this Agreement, each party shall
pay its own expenses incurred in connection with the authorization, preparation,
execution and performance of this Agreement, including all fees and expenses of
counsel, accountants, agents and other representatives.
7.14. Noncompetition; Nonsolicitation. TCI or Cox, as applicable, in
-------------------------------
its capacity as Transferor covenants to execute and deliver at Closing a
noncompetition and nonsolicitation agreement substantially in the form attached
hereto as Exhibit D (the "Noncompetition and Nonsolicitation Agreement").
---------
46
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7.15. Cooperation; Satisfaction of Conditions. Each party shall
---------------------------------------
cooperate fully with the other and their respective counsel, accountants and
other business personnel in connection with any action required to be taken as
part of their respective obligations under this Agreement, and each party shall
execute such other documents as may be necessary and desirable to the
implementation and consummation of this Agreement, and otherwise use diligent
efforts to consummate the transaction contemplated hereby and to fulfill their
obligations hereunder. Except as otherwise expressly provided herein, each
party will use its commercially reasonable efforts to satisfy, or to cause to be
satisfied, the conditions to the obligations of the other party to consummate
the transactions contemplated by this Agreement, as set forth in Section 9,
provided that Transferee will not be required to agree to any increase in the
amount payable with respect to, or any modification that makes more burdensome
in any material respect, any of the Assumed Liabilities.
7.16. Confidentiality. Each party shall keep secret and hold in
---------------
confidence for a period of two years following the date hereof, any and all
information relating to the other party that is confidential to such other party
(it being understood and agreed that all proprietary information of Transferor
that is included among the Assets shall become the proprietary information of
Transferee upon Closing), other than the following: (i) information that has
become generally available to the public other than as a result of a disclosure
by such party; (ii) information already known to Transferee prior to its
disclosure by Transferor, (iii) information that becomes available to such party
or an agent of such party on a nonconfidential basis from a third party having
no obligation of confidentiality to a party to this Agreement; (iv) information
that is required to be disclosed by applicable law, judicial order or pursuant
to any listing agreement with, or the rules or regulations of, any securities
exchange on which securities of such party or any such affiliate are listed or
traded; and (v) disclosures made by any party as shall be reasonably necessary
in connection with obtaining the Required Consents; provided, however, in
connection with disclosure of confidential information under (iv) and (v)
hereof, the disclosing party shall give the other party hereto timely prior
notice of the anticipated disclosure and the parties shall cooperate in
designing reasonable procedural and other safeguards to preserve, to the maximum
extent possible, the confidentiality of such material. Each party may also
disclose such information to employees, consultants, advisors, agents and actual
or potential lenders whose knowledge is necessary to facilitate the consummation
of the transactions contemplated by this Agreement. Each party's obligation to
hold information in confidence will be satisfied if it exercises the same care
with respect to such information as it would exercise to preserve the
confidentiality of its own similar information.
7.17. Publicity. No party hereto will issue any press release or
---------
otherwise make any public statement with respect to this Agreement and the
transactions contemplated hereby without the prior consent of the other party
(which consent shall not be unreasonably withheld), except as may be required by
applicable Legal Requirements, in which event the party required to make the
release or announcement shall, if possible, allow the other party reasonable
time to comment on such release or announcement or obtain a protective order at
its own expense in advance of such issuance.
7.18. Billing Services. At Closing, TCI, L.P. and Cox will execute and
----------------
deliver an Agreement to Provide Billing Services in a form mutually agreeable to
the parties. The Agreement
47
<PAGE>
to Provide Billing Services will provide that TCI or Cox, as applicable, in its
capacity as Transferor or its agent will perform billing services for Transferee
with respect to the Systems received by Transferee for the 180-day period
immediately following Closing and Transferee will pay Transferor a fee of 70c
per customer per month for such services.
7.19. Delivery of Financial Information. TCI or Cox, as applicable,
---------------------------------
in its capacity as Transferor shall deliver to Transferee within 30 days after
the end of each month ending between the date of this Agreement and the Closing
Date a statement of income and expense for the month previously ended and such
other financial information (including information on payables and receivables)
as Transferee may reasonably request. The income statements delivered by
Transferor to Transferee pursuant to this Section shall be in accordance with
the books and records of the Systems and shall present fairly in all material
respects the results of operations of the Systems for the year-to-date periods
then ended. Promptly after the preparation thereof, Transferor shall deliver to
Transferee copies of any other financial statements, subscriber counts and other
operational data regularly prepared by Transferor for its internal use; provided
that Transferor shall not be required to make and shall not be deemed to make
any representation or warranty concerning any such information delivered to
Transferee (other than that the information furnished to Transferee is a true
and complete copy of the information prepared by Transferor for its internal
use).
7.20. Capital Expenditures. From the date of this Agreement until
--------------------
Closing, TCI or Cox, as applicable, in its capacity as Transferor agrees to make
capital expenditures for purposes of completing line extensions, placing conduit
or cable in new developments, fulfilling installation requests, and upgrading
cable plant and converters in each of Transferor's Systems in the amounts set
forth on SCHEDULE 3.2.6. Without limiting the foregoing, Cox agrees to complete
the Quad Cities Rebuild prior to Closing. Transferee may request Transferor to
make capital expenditures in excess of the budgeted amounts set forth in
SCHEDULE 3.2.6, provided, however, that any capital expenditures that Transferor
may agree to make at Transferee's request prior to Closing in excess of the
budgeted amounts indicated in SCHEDULE 3.2.6, shall be credited to Transferor
for purposes of adjusting the Cash Consideration as provided in Section 3.2.6
hereof. Notwithstanding the foregoing, the consent of Transferee shall not be
required for Transferor to complete line extensions, place conduit or cable in
new developments, or fulfill installation requests if the applicable project (A)
passes on average 20 or more residential dwellings, multiple dwelling units
and/or commercial establishments per mile and (B) involves the expenditure of
less than $50,000, and Transferor shall receive a credit pursuant to Section
3.2.6 for the cost of any such projects to the extent Transferor has then
expended at least the amount set forth on SCHEDULE 3.2.6 for such System.
7.21. Franchise Renewals. TCI or Cox, as applicable, in its capacity
------------------
as Transferor shall file all requests for renewal under Section 626(a) of the
Cable Act with the proper Governmental Authority with respect to any Franchise
at least 30 months prior to the expiration of any such Franchise, provided that
Transferor shall consult with Transferee prior to the filing of any such renewal
requests. Transferor shall use commercially reasonable efforts to pursue all
requests for renewal in consultation with Transferee.
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<PAGE>
7.22. Use of Transferor's Name. For a period of 90 days after the
------------------------
Closing Date, TCI or Cox, as applicable, in its capacity as Transferee may
continue (but only to the extent reasonably necessary) to operate the System
using Transferor's name and all derivations and abbreviations of such name and
related trade names and marks in use in the Systems on the Closing Date, such
use to be in a manner consistent with the way in which Transferor has used the
marks. Within 90 days after the Closing Date, Transferee will discontinue using
and will dispose of all items of stationery, business cards and literature
bearing such names or marks. Notwithstanding the foregoing, Transferee will not
be required to remove or discontinue using any such name or mark that is affixed
to converters or other items in or to be used in customer homes or properties,
or as are used in similar fashion making such removal or discontinuation
impracticable for Transferee. Transferor will be entitled to indemnification (as
provided in Section 12.3) with respect to Transferee's misuse of such names and
marks.
7.23. Completion of the Contribution. TCI shall complete the
------------------------------
Contribution prior to Closing.
7.24. Certain Post-Closing Covenants. Each of TCI, L.P. and Cox
------------------------------
shall maintain ownership of sufficient cable television assets to maintain a
positive Net Worth of not less than $50,000,000 at all times during the period
beginning on the Closing Date and ending on the last day of the fourth full
calendar quarter immediately following the Closing Date. Each of TCI, L.P. and
Cox shall deliver to the other within 75 days after the end of each of the four
full calendar quarters immediately following the Closing Date a certificate (a
"Cash Flow Certificate") signed by an officer of such entity (without personal
liability) certifying compliance with this minimum Net Worth standard for the
preceding calendar quarter. For purposes of this Section 7.24, "Net Worth" shall
mean the amount obtained by multiplying such party's Annualized Cash Flow by 10
and subtracting from the product thereof, the amount of such party's liabilities
(determined in accordance with GAAP and including both reported liabilities and
pledges) as of the last day of the calendar quarter immediately preceding the
date of delivery of the Cash Flow Certificate.
7.25. Updated Schedules. Not less than five Business Days prior to
-----------------
Closing, each of TCI and Cox will deliver to the other revised copies of each of
the Schedules applicable to it or its System which shall have been updated to
the date of delivery and marked to show any changes occurring between the date
of this Agreement and the date of delivery (but not copies of Schedules where no
changes need to be reflected).
7.26. Leased Vehicles. Each of TCI and Cox will, at or prior to the
---------------
Closing, pay the remaining balances on any leases for vehicles included in its
Tangible Personal Property and will deliver title to such vehicles, free and
clear of all Encumbrances other than Permitted Encumbrances, to the other party
at the Closing.
7.27. DCR/DMX. Each of TCI and Cox shall (i) use commercially
-------
reasonable efforts to obtain authorization for the other party to utilize DMX
and DCR respectively for a period of 90 days after Closing pending conversion of
such music services from one programmer to the other, and (ii) permit Transferee
to utilize the DMX or DCR music converter boxes for a period of
49
<PAGE>
90 days after Closing. Upon the earlier of the conversion of music services or
the termination of such 90-day period, Transferee shall return the music
converter boxes to Transferor.
7.28. Additional System(s).
--------------------
7.28.1. Cox agrees to acquire and will cooperate with TCI in
acquiring one or more cable television systems which are identified, designated
and valued by TCI (the "Additional System"). If such Additional System is
identified and designated by TCI on or within 45 days after the Closing Date and
acquired on or before the Outside Additional System Closing, then such
Additional System shall be transferred to TCI effective as of the Closing Date.
If Cox acquires or will acquire the Additional System on or prior to the
Additional System Outside Closing date, TCI and Cox will cooperate with each
other to make such amendments or changes to this Agreement or enter into such
other agreements or execute such other documents necessary or desirable to
consummate the transactions contemplated by this Section.
7.28.2. Cox shall reasonably cooperate with TCI and each shall
consult with the other with respect to the negotiation of the Additional System
Agreement to be entered into by TCI. TCI shall assign its rights to acquire the
Additional System assets to Cox and the Additional System assets shall be
exchanged with TCI as provided herein. TCI shall bear all costs and expenses
incurred by Cox or TCI in connection with the acquisition of the Additional
System(s), including, without limitation, all fees and expenses of any
investment banker, investment advisor, broker, finder or agent employed by TCI
or Cox in connection with the transactions contemplated in the Additional System
Agreement.
7.29. Interim Financial Statements. Each of TCI and Cox shall
----------------------------
deliver unaudited quarterly financial statements for each of the Systems owned
by it for each calendar quarter ending between the date of this Agreement and
the Closing Date (the "Interim Financial Statements"). The Interim Financial
Statements shall contain balance sheets and statements of income as, at and for
the three months then ended. The Interim Financial Statements shall be prepared
in accordance with GAAP consistently applied, except for the absence of
footnotes. The Interim Financial Statements shall be in accordance with the
books and records of TCI and Cox, as the case may be, and present fairly the
operating income and financial condition of the TCI Systems and the Cox Systems,
as the case may be, as at their respective dates and the results of operations
for the periods then ended. None of the Interim Financial Statements shall
understate the true costs and expenses of conducting the business or operations
of the TCI Systems or the Cox Systems, as the case may be, or inflate the
revenue of the TCI Systems or the Cox Systems, as the case may be, because of
the provision of services or the bearing of costs or expenses or the payment of
fees by any other person or for any other reason.
7.30. Iowa Microwave Interconnect. For a period of 90 days beginning
---------------------------
on the Closing Date, TCI, L.P. agrees to deliver to the Council Bluffs headend,
those signals currently being delivered to that headend via the Iowa microwave
path.
50
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8. Closing.
-------
The Closing of the transactions contemplated by this Agreement will be
held on a date acceptable to the parties that is within 30 days after all
conditions to the Closing contained in this Agreement (other than those based on
acts to be performed at the Closing) have been satisfied or waived. The Closing
will be held at 10:00 a.m. local time at the offices of Dow, Lohnes & Albertson
located at One Ravinia Drive, Suite 1600, Atlanta, Georgia 30346, or will be
conducted by mail or at such place and time as the parties may agree.
9. Conditions to Closing.
---------------------
9.1. Conditions to the Obligations of Transferee and Transferor. The
----------------------------------------------------------
obligations of each party to consummate the transactions contemplated by this
Agreement to take place at the Closing are subject to the satisfaction or waiver
by both parties in writing, to the extent permitted by applicable Legal
Requirements, at or prior to the Closing Date of each of the following
conditions:
9.1.1. All filings under the HSR Act have been made and the
applicable waiting period has expired or been earlier terminated without the
receipt of any objection or the commencement of any threat of litigation by any
Governmental Authority of competent jurisdiction to restrain the consummation of
the transactions contemplated by this Agreement.
9.1.2. No action, suit or proceeding is pending or threatened
by or before any Governmental Authority and no Legal Requirement has been
enacted, promulgated or issued or deemed applicable to any of the transactions
contemplated by this Agreement the result of which is to enjoin, restrain,
prohibit or obtain substantial damages in respect of any of the transactions
contemplated by this Agreement, or which would (i) prohibit Transferee's
ownership or operation of all or a material portion of the business or
operations of the Systems or the Assets, (ii) compel Transferee to dispose of or
hold separate all or a material portion of the Systems, the business or
operations of the Systems or the Assets as a result of any of the transactions
contemplated by this Agreement or (iii) otherwise prevent or make illegal the
consummation of any transactions contemplated by this Agreement.
9.1.3. The Contribution shall have been consummated and
evidence thereof provided to Cox.
9.2 Conditions to the Obligations of Transferee. The obligations
-------------------------------------------
of each party in its capacity as Transferee to consummate the transactions
contemplated by this Agreement to take place at the Closing are subject to the
satisfaction or waiver by such party in writing, to the extent permitted by
applicable Legal Requirements, at or prior to the Closing Date, of each of the
following conditions:
9.2.1. All representations and warranties of the other party
contained in this Agreement are, if specifically qualified by materiality, true
and correct in all respects and, if not so
51
<PAGE>
qualified, are true and correct in all material respects on and as of the
Closing Date with the same effect as if made on and as of the Closing Date
except for changes permitted or contemplated by this Agreement.
9.2.2. The other party in all material respects has performed
and complied with each obligation, agreement, covenant and condition required by
this Agreement to be performed or complied with by it at or prior to the
Closing.
9.2.3. Between the date of this Agreement and the Closing
Date, there shall have been no changes, events or conditions which have had a
Material Adverse Effect or a System Material Adverse Effect on the Systems to be
acquired by such party; provided, however, that the status of the Franchise
granted by St. Bernard, Louisiana shall not be considered in determining a
"System Material Adverse Effect" of the St. Bernard System for purposes of the
condition precedent contained in this Section 9.2.3.
9.2.4. The other party has executed (or caused to be executed)
and delivered to such party in its capacity as Transferee each of the following
items with respect to the Assets to be acquired by such party:
(i) duly executed warranty bills of sale, motor
vehicle titles, assignments and other transfer
documents which shall be sufficient to vest good
title to the Assets in the name of Transferee or
its permitted assignees, free and clear of any
Encumbrances other than Permitted Encumbrances;
(ii) a limited or special warranty deed in a form
reasonably acceptable to such party in its
capacity as Transferee (and complying with
applicable state laws) with respect to each
parcel of owned Real Property, duly executed and
acknowledged and in recordable form, warranting
good and marketable fee simple title to such
Real Property against all persons claiming by,
through or under the other party in its capacity
as Transferor, subject only to Permitted
Encumbrances, and in form sufficient to permit
the title company to issue the title policy
described in Section 7.6 to Transferee with
respect to such Real Property;
(iii) an affidavit of the other party in its capacity
as Transferor, under penalty of perjury, that
such party is not a "foreign person" (as defined
in the Foreign Investment in Real Property Tax
Act and applicable regulations) and that
Transferee is not required to withhold any
portion of the consideration payable under this
Agreement under the provisions of such Act; and
52
<PAGE>
(iv) such other transfer instruments as such party in
its capacity as Transferee may deem necessary or
advisable to transfer the Assets to such party
and to perfect such party's rights in the
Assets.
9.2.5. Subject to Article 10 below, the other party has
delivered to such party evidence, in form and substance satisfactory to such
party as described in Section 7.5.1, that all of the Required Consents noted
with an asterisk (*) on SCHEDULE 5.3 or SCHEDULE 6.3, as applicable, have been
obtained or given and are in full force and effect.
9.2.6. As of Closing, the other party shall have no fewer than
the number of Equivalent Billing Units in the aggregate indicated on SCHEDULE
9.2.6.
9.2.7. Where the Transferee is TCI, Cox shall have (i) paid
the Cash Consideration required to be paid at the Closing to TCI, (ii) Cox shall
have paid the Cash Consideration in full or in part to the seller of an
Additional System and paid the remainder, if any, to TCI, or (iii) Cox shall
have deposited the Cash Consideration into an escrow account as provided in
Section 3.4.
9.2.8. Where the Transferee is Cox, Transferee shall have
received the opinion of TCI's General Counsel, dated the Closing Date, in the
form set forth in Exhibit E.
---------
9.2.9. Where the Transferee is TCI, L.P., Transferee shall
have received the opinion of Dow, Lohnes & Albertson, counsel for Cox, dated the
Closing Date, in the form set forth in Exhibit F.
---------
9.2.10. The other party has delivered releases, in form
satisfactory to such party, of all Encumbrances affecting any of the Assets
other than Permitted Encumbrances.
9.2.11. Such party has received the title insurance commitments
described in Section 7.6.
9.2.12. The other party has delivered to such party the
following: (i) a certificate, dated the Closing Date, signed by an executive
officer of each of the entities comprising the other party, without personal
liability, stating that to his or her knowledge, the conditions set forth in
Sections 9.2.1 and 9.2.2 are satisfied; and (ii) the total number of Equivalent
Billing Units for all of Transferor's Systems, estimated in good faith as of the
Closing Date.
9.2.13. The other party has delivered to such party a
certificate, dated as of the Closing Date, executed by the Secretary of each of
the entities comprising the other party, without personal liability: (i)
certifying that the resolutions, as attached to such certificate, were duly
adopted by such Transferor's Board of Directors and stockholders (if required),
authorizing and approving the execution of this Agreement and the consummation
of the transaction contemplated hereby and that such resolutions remain in full
force and effect; and (ii) certifying as to the
53
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incumbency of each signatory to this Agreement and any ancillary agreements
executed by the other party.
9.2.14. The other party has executed and delivered a
Noncompetition and Nonsolicitation Agreement.
9.2.15. The Quad Cities Rebuild shall have been completed and
TCI, L.P. shall have received a certificate, dated on or before the Closing
Date, executed by an officer of Cox, without personal liability, stating that
the Quad Cities Rebuild has been completed.
9.3. Conditions to Obligations of Transferor. The obligations of
---------------------------------------
each party in its capacity as Transferor to consummate the transactions
contemplated by this Agreement to take place at the Closing are subject to the
satisfaction or waiver by such party in writing to the extent permitted by
applicable Legal Requirements at or prior to the Closing Date, of each of the
following conditions:
9.3.1. All representations and warranties of the other party
contained in this Agreement are true and correct in all material respects on and
as of the Closing Date with the same effect as if made on and as of the Closing
Date, except for changes permitted or contemplated by this Agreement.
9.3.2. The other party in all material respects has performed
and complied with each obligation, agreement, covenant and condition required by
this Agreement to be performed or complied with by it at or prior to the
Closing.
9.3.3. The other party has executed and delivered to such
party in its capacity as Transferor an assumption agreement in the form set
forth in Exhibit G.
---------
9.3.4. The other party has delivered to such party the
following: (i) a certificate dated the Closing Date, signed by an executive
officer of each of the entities comprising the other party without personal
liability, stating that to his or her knowledge, the conditions set forth in
Sections 9.3.1 and 9.3.2, are satisfied and (ii) such other documents as such
party may reasonably request in connection with the transactions contemplated by
this Agreement.
9.4. Waiver of Conditions. Any party may waive in writing any or
--------------------
all of the conditions to its obligations under this Agreement.
10. Primary and Secondary Transfers.
-------------------------------
10.1. Primary Transfer. In order to avoid the situation where the
----------------
entire like-kind exchange of assets contemplated by this Agreement is delayed
pending the receipt of a small number of Franchise Required Consents, the
parties agree that if after 180 days following the date of this Agreement (i)
the aggregate number of Equivalent Billing Units covered by TCI Franchises that
either do not require consent or as to which Required Consents have been
obtained shall equal 95%
54
<PAGE>
of the number of Equivalent Billing Units for each TCI System as indicated on
SCHEDULE 3.2.7; (ii) the aggregate number of Equivalent Billing Units covered by
Cox Franchises that either do not require consent or as to which Required
Consents have been obtained shall equal 95% of the number of Equivalent Billing
Units for each Cox System as indicated on SCHEDULE 3.2.7; (iii) all conditions
precedent to Closing contained in Article 9 (other than the condition contained
in Section 9.2.5 as it relates to Franchise Required Consents) above have been
satisfied or waived, and (iv) the franchise agreements for which consents are
not obtained do not in the reasonable judgment of the party transferring such
Franchise hereunder prohibit the actions contemplated by this Article 10, TCI,
L.P. and Cox shall transfer, convey and assign (the "Primary Transfer") all of
the TCI Assets and all of the Cox Assets, with the exception of those Franchises
as to which Required Consents have not been obtained (such Franchises referred
to herein as "Retained Franchises").
10.2. Subsequent Transfers. Following the Primary Transfer the
--------------------
parties shall continue to use commercially reasonable efforts to obtain Required
Consents for Retained Franchises. Within 10 Business Days of obtaining a
Required Consent for a Retained Franchise, the Transferor shall assign and
transfer such Retained Franchise to Transferee (a "Subsequent Transfer") free
and clear of all Encumbrances other than Permitted Encumbrances.
10.3. Management Agreements. Concurrent with the Primary Transfer,
---------------------
each party retaining Retained Franchises shall enter into a management agreement
substantially in the form of Exhibit H attached hereto (the "Management
---------
Agreement") with respect to each area served by a Retained Franchise. The
Management Agreement shall require the Transferee to manage that portion of the
Service Area within the Retained Franchise and shall provide that Transferee
shall bear the expenses relating to such operations and retain the revenues
relating thereto, the net operating cash flow from those areas being
Transferee's sole compensation for managing the Retained Franchise areas. The
Management Agreement shall further provide that the Management Agreement shall
no longer apply to a Retained Franchise upon a Subsequent Transfer thereof.
10.4. Construction. For purposes of the Primary Transfer, all
------------
references in this Agreement to the Closing shall refer to the Primary Transfer
and all references in this Agreement to the Closing Date shall refer to the date
of the Primary Transfer and all provisions contained herein shall be applied
with respect to the Assets and Systems conveyed in the Primary Transfer in the
same manner as the exchange of all of the TCI Assets and Systems for all of the
Cox Assets and Systems consummated simultaneously.
10.5. Cash Consideration. In the event the Closing is consummated as
------------------
contemplated by this Article 10, the Cash Consideration shall be adjusted in
accordance with Section 3.2 and paid in full at the time of the Primary
Transfer. For purposes of the Closing, the number of Equivalent Billing Units
shall be determined and the calculation of the adjustment pursuant to Section
3.2.7 hereof shall be made at the time of the Primary Transfer, and such
determination and such calculation shall take into account Equivalent Billing
Units in Systems that are being transferred and Equivalent Billing Units in
Systems that are being retained.
55
<PAGE>
10.6. Termination of Management Agreement or Revocation of Retained
-------------------------------------------------------------
Franchise. If a Retained Franchise is revoked as a result of the Management
- ---------
Agreement or a court orders the termination of a Management Agreement anytime
prior to the second anniversary of the Closing Date, the parties acknowledge
that the Transferee providing cable service to the area covered by a Retained
Franchise will suffer a loss, and the Transferor retaining the Retained
Franchise shall compensate the Transferee for the fair value of such loss. The
parties shall use their best efforts to determine the fair value represented by
such loss. If a Retained Franchise is revoked or a court orders the termination
of a Management Agreement on or after the second anniversary of the Closing
Date, there shall be no compensation paid by the Transferor to the Transferee.
The Transferor retaining a Retained Franchise shall be responsible for and bear
the expense of defending any legal challenges alleging the premature, unlawful
or invalid transfer of a Retained Franchise.
11. Termination.
-----------
11.1. Events of Termination. This Agreement may be terminated and
---------------------
the transactions contemplated by this Agreement may be abandoned at any time
prior to the Closing:
11.1.1. by the mutual written consent of the parties;
11.1.2. by any party, if the transactions contemplated by this
Agreement to take place at the Closing have not been consummated by the first
anniversary of this Agreement for any reason other than (i) a material breach or
material default by such party in the performance of any of its obligations
under this Agreement, or (ii) the failure of any representation or warranty of
such party to be accurate in all material respects; or
11.1.3. by Transferee under the conditions described in Section
7.7 or Section 7.11.
11.2. Liabilities in Event of Termination. The termination of this
-----------------------------------
Agreement will in no way limit any obligation or liability of any party based on
or arising from a breach or default by such party with respect to any of its
representations, warranties, covenants or agreements contained in this
Agreement, except that Transferee will have no liability in any event upon
exercise of its right to terminate pursuant to Section 11.1.3.
11.3. Procedure Upon Termination. In the event of the termination of
--------------------------
this Agreement by Transferee or Transferor pursuant to this Section 11, notice
of such termination will promptly be given by the terminating party to the
other.
12. Survival; Indemnification.
-------------------------
12.1. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties contained in this Agreement and all covenants and
agreements (which covenants and agreements by their terms are to be performed
and completed prior to Closing) contained in this Agreement or in documents or
instruments delivered pursuant hereto shall be deemed continuing
56
<PAGE>
representations, warranties, covenants and agreements, and shall survive the
Closing Date for a period ending on the first anniversary of the Closing Date
(the "Survival Period") unless a longer period of survival is otherwise provided
for in this Agreement; provided, however, that the representations and
warranties regarding tax and environmental matters contained in Sections 5.14,
5.16, 6.14 and 6.16 and the representations and warranties regarding ERISA,
employment matters and copyright matters shall survive for the period of the
applicable statute of limitations and the representations and warranties
regarding title to the Assets contained in Sections 5.5, 5.6, 5.9, 6.5, 6.6, and
6.9 shall survive indefinitely. The written assertion of any claim by Transferor
or Transferee against the other hereunder with respect to the breach or alleged
breach of any representation, warranty, covenant or agreement shall extend the
period during which such representation, warranty, covenant or agreement
survives through the date such claim is conclusively resolved. The covenants and
agreements contained in this Agreement or in documents or instruments delivered
pursuant hereto which by their terms are to be performed after Closing shall
survive the Closing and continue in effect in accordance with their terms.
12.2 Indemnification by Transferor. Each of TCI, L.P., and Cox in
-----------------------------
its capacity as Transferor will indemnify, defend and hold harmless the other
party in its capacity as Transferee and its shareholders and its and their
respective Affiliates, and the shareholders, partners, directors, officers,
employees, agents, successors and assigns of any of such Persons, from and
against:
12.2.1. all losses, damages, liabilities, deficiencies or
obligations of or to the other party in its capacity as Transferee or any such
other indemnified Person resulting from or arising out of (i) any breach of any
representation or warranty made by such party in its capacity as Transferor or
by its Affiliates in this Agreement, (ii) any breach of any covenant, agreement
or obligation of such party in its capacity as Transferor or of its Affiliates
contained in this Agreement, (iii) any act or omission of such party in its
capacity as Transferor or of its Affiliates with respect to, or any event or
circumstance related to, the ownership or operation of the Assets or the conduct
of the business and operations of the Systems, which act, omission, event or
circumstance occurred or existed prior to the Closing Date, without regard to
whether a claim with respect to such matter is asserted before or after the
Closing Date, including any matter described on SCHEDULE 5.15 (TCI) or SCHEDULE
6.15 (Cox), (iv) any claimed violation by such party in its capacity as
Transferor or by its Affiliates of any bulk transfer or fraudulent conveyance
laws of any jurisdiction arising out of the transactions contemplated by this
Agreement, (v) any Employee Plans or Compensation Arrangements of such party or
its Affiliates; (vi) any act or omission of such party or its Affiliates which
relates to "continuation coverage" (as defined in Section 7.3.2) or because the
other party in its capacity as Transferee or its Affiliates is deemed to be a
successor employer to such party or (vii) any other liabilities of such party or
its Affiliates, including rate refund liability, that are not Assumed
Liabilities; (viii) the presence, generation, removal or transportation of a
Hazardous Substance on or from any of the Real Property of such party or its
Affiliates prior to the Closing Date, including the costs of removal or clean-up
of such Hazardous Substances and other compliance with the provisions of any
Environmental Laws (whether before or after Closing) or (ix) any liability or
obligation of such party in its capacity as Transferor or of its Affiliates with
respect to the Systems to the extent not included in the Assumed Liabilities
assumed by the other party in its capacity as Transferee; and
57
<PAGE>
12.2.2. all claims, actions, suits, proceedings, demands,
judgments, assessments, fines, refunds, interest, penalties, costs and expenses
(including, without limitation, settlement costs and reasonable legal,
accounting, experts' and other fees, costs and expenses) incident or relating to
or resulting from any of the foregoing.
In the event that an indemnified item arises under both clause (i) and under one
or more of clauses (ii) through (vii) of Section 12.2.1, a party's right to
pursue its claim in its capacity as Transferee under clauses (ii) through (ix),
as applicable, will exist notwithstanding the expiration of the Survival Period
applicable to such claim under clause (i).
12.3. Indemnification by Transferee. Each of TCI, L.P., and Cox in
-----------------------------
its capacity as Transferee will indemnify, defend and hold harmless the other
party in its capacity as Transferor and its and their respective Affiliates, and
the shareholders, partners, directors, officers, employees, agents, successors
and assigns of any such Persons, from and against:
12.3.1 all losses, damages, liabilities, deficiencies or
obligations of or to the other party in its capacity as Transferor or any such
other indemnified Person resulting from or arising out of (i) any breach of any
representation or warranty, covenant, agreement or obligation of such party in
its capacity as Transferee contained in this Agreement or (ii) the failure by
such party in its capacity as Transferee to perform any of its obligations in
respect of the Assumed Liabilities after Closing; and
12.3.2. all claims, actions, suits, proceedings, demands,
judgments, assessments, fines, interest, penalties, costs and expenses
(including, without limitation, settlement costs and reasonable legal,
accounting, experts' and other fees, costs and expenses) incident or relating to
or resulting from any of the foregoing.
In the event that an indemnified item arises under both clause (i) and under
clause (ii) of Section 12.3.1, a party's right to pursue its claim in its
capacity as Transferor under clause (ii) will exist notwithstanding the
expiration of the Survival Period applicable to such claim under clause (i).
12.4. Procedure for Indemnification. The procedure for
-----------------------------
indemnification shall be as follows:
12.4.1. The party claiming indemnification (the "Claimant")
shall promptly give notice to the party from whom indemnification is claimed
(the "Indemnifying Party") of any claim, whether between the parties or brought
by a third party, specifying (i) the factual basis for such claim and (ii) the
amount of the claim. If the claim relates to an action, suit or proceeding filed
by a third party against Claimant, such notice shall be given by Claimant within
ten days after written notice of such action, suit or proceeding was given to
Claimant; provided, however, that failure of the Claimant to give the
Indemnifying Party notice as provided herein shall not relieve the Indemnifying
Party of its obligations hereunder, except to the extent that such failure to
give notice shall prejudice any defense or claim available to the Indemnifying
Party.
58
<PAGE>
12.4.2. Following receipt of notice from the Claimant of a
claim, the Indemnifying Party shall have 30 days to make such investigation of
the claim as the Indemnifying Party deems necessary or desirable. For the
purposes of such investigation, the Claimant agrees to make available to the
Indemnifying Party and/or its authorized representative(s) the information
relied upon by the Claimant to substantiate the claim. If the Claimant and the
Indemnifying Party agree at or prior to the expiration of said 30-day period (or
any mutually agreed upon extension thereof) to the validity and amount of such
claim, the Indemnifying Party shall immediately pay to the Claimant the full
amount of the claim subject to the terms and in accordance with the procedures
set forth herein. If the Claimant and the Indemnifying Party do not agree within
said period (or any mutually agreed upon extension thereof), the Claimant may
seek appropriate legal remedy.
12.4.3. With respect to any claim by a third party as to which
the Claimant is entitled to indemnification hereunder, the Indemnifying Party
shall have the right at its own expense, to participate in or assume control of
the defense of such claim, and the Claimant shall cooperate fully with the
Indemnifying Party. If the Indemnifying Party elects to assume control of the
defense of any third-party claim, the Claimant shall have the right to
participate in the defense of such claim at its own expense. If the Indemnifying
Party does not elect to assume control or otherwise participate in the defense
of any third party claim, it shall be bound by the results obtained by the
Claimant with respect to such claim.
12.4.4. If a claim, whether between the parties or by a third
party, requires immediate action, the parties will make every effort to reach a
decision with respect thereto as expeditiously as possible.
12.5. Limitations on Liability.
------------------------
12.5.1. Neither TCI, L.P. nor Cox shall be required to
indemnify the other under Section 12.2.1(i) and 12.2.2 (to the extent it applies
to 12.2.1(i)) in the case of TCI, L.P. or under Section 12.3.1(i) and 12.3.2,
(to the extent it applies to 12.3.1(i)) in the case of Cox until the aggregate
amount of Claimant's claims exceeds $500,000 (the "Threshold Amount"), and if
such claims exceed the Threshold Amount, the party shall be entitled to recover
all of its losses, including, without limitation, the amount of the Threshold
Amount.
12.5.2. A party's liability under this Article 12 shall be
limited to losses or damages not exceeding in the aggregate $50,000,000.
12.5.3. In the absence of fraud, the sole and exclusive remedy
of any party for any misrepresentation or any breach of a warranty or covenant
set forth in or made pursuant to this Agreement shall be a claim for
indemnification under and pursuant to this Article 11; provided, that the
foregoing limitation shall not apply to a claim by any party with respect to the
failure of any other party to fulfill its obligations to consummate the
transactions contemplated by this Agreement.
12.5.4. Notwithstanding the foregoing, the limitations
contained in this Section 12.5 shall not apply to indemnification claims brought
by Transferee relating to liabilities
59
<PAGE>
of Transferor (including, without limitation, rate
refund liability) that are not Assumed Liabilities or to indemnification claims
brought by TCI, L.P. or Cox against the other party alleging the failure by such
party to perform any of its obligations in respect of the Assumed Liabilities.
12.6. Special Indemnification relating to the Additional System(s).
------------------------------------------------------------
TCI shall indemnify Cox against all losses, damages, liabilities, deficiencies
or obligations arising from any claims brought by seller of the Additional
System or any other third party relating to the Additional System or the
Additional System Agreement. The limitations set forth in Sections 12.1 and
12.5 hereto shall not apply to the obligation of TCI set forth in this Section
12.6.
12.7. Release of TCI Subsidiaries. From and after the Closing Date,
---------------------------
the TCI Subsidiaries shall be released, without further action on the part of
any party hereto, from all liabilities and obligations under this Agreement.
13. Miscellaneous.
-------------
13.1. Parties Obligated and Benefitted. Subject to the limitations
--------------------------------
set forth below, this Agreement will be binding upon the parties and their
respective assigns and successors in interest and will inure solely to the
benefit of the parties and their respective assigns and successors in interest,
and no other Person will be entitled to any of the benefits conferred by this
Agreement. Without the prior written consent of the other parties, no party will
assign any of its rights under this Agreement or delegate any of its duties
under this Agreement except pursuant to the Contribution (but any assignment in
connection with the Contribution shall not release the assignor from its
obligations hereunder except as specified in Section 12.7).
13.2. Notices. Any notice, request, demand, waiver or other
-------
communication required or permitted to be given under this Agreement will be in
writing and will be deemed to have been duly given only if delivered in person
or by first class, prepaid, registered or certified mail, or sent by courier or,
if receipt is confirmed, by telecopier:
If to TCI:
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attn: Ms. Carol E. O'Keeffe
Fax: (303) 488-3219
and
Attn: Legal Department
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111-3000
60
<PAGE>
Fax: (303) 488-3207
With a copy to:
Joanne Norris, Esq.
Sherman & Howard, LLC
First Interstate Tower North
633 Seventeenth Street, Suite 3000
Denver, Colorado 80202
Fax: (303) 298-0940
If to Cox:
c/o Cox Communications, Inc.
1400 Lake Hearn Drive, N.E.
Atlanta, Georgia 30319
Attn: Mr. John M. Dyer
Fax: (404) 847-6336
With a copy to:
Stuart A. Sheldon, Esq.
Dow, Lohnes & Albertson
1200 New Hampshire Avenue, N.W.
Suite 800
Washington, D.C. 20036
Fax: (202) 776-2222
Any party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section 13.2. All
notices will be deemed to have been received on the date of delivery or on the
third Business Day after mailing in accordance with this Section, except that
any notice of a change of address will be effective only upon actual receipt.
13.3. Right to Specific Performance; Remedies. The parties recognize
---------------------------------------
that in the event a party hereto should refuse to perform under the provisions
of this Agreement, monetary damages alone will not be adequate. The
nonbreaching party shall therefore be entitled, in addition to any other
remedies which may be available, including money damages, to obtain specific
performance of the terms of this Agreement. In the event of any action to
enforce this Agreement, the breaching party hereby waives the defense that there
is an adequate remedy at law. In the event of a breach or default which results
in the filing of a lawsuit for damages, specific performance or other remedy,
the nonbreaching party shall be entitled to reimbursement by the breaching party
of reasonable legal fees and expenses actually incurred by the nonbreaching
party.
61
<PAGE>
13.4. Waiver. This Agreement or any of its provisions may not be
------
waived except in writing. The failure of any party to enforce any right arising
under this Agreement on one or more occasions will not operate as a waiver of
that or any other right on that or any other occasion.
13.5. Captions. The article and section captions of this Agreement
--------
are for convenience only and do not constitute a part of this Agreement.
13.6. Choice of Law. This agreement and the rights of the parties
-------------
under it will be governed by and construed in all respects in accordance with
the laws of the State of Delaware without regard to the conflicts of law
principles of such State.
13.7. Terms. Terms used with initial capital letters will have the
-----
meanings specified, applicable to both singular and plural forms, for all
purposes of this Agreement. The word "include" and derivatives of that word are
used in this Agreement in an illustrative sense rather than limiting sense.
13.8. Rights Cumulative. All rights and remedies of each of the
-----------------
parties under this Agreement will be cumulative, and the exercise of one or more
rights or remedies will not preclude the exercise of any other right or remedy
available under this Agreement or applicable law.
13.9. Further Actions. Transferor and Transferee will execute and
---------------
deliver to the other, from time to time at or after the Closing, for no
additional consideration and at no additional cost to the requesting party, such
further assignments, certificates, instruments, records, or other documents,
assurances or things as may be reasonably necessary to give full effect to this
Agreement and to allow each party fully to enjoy and exercise the rights
accorded and acquired by it under this Agreement.
13.10. Time of the Essence. Time is of the essence under this
-------------------
Agreement. If the last day permitted for the giving of any notice or the
performance of any act required or permitted under this Agreement falls on a day
that is not a Business Day, the time for the giving of such notice or the
performance of such act will be extended to the next succeeding Business Day.
13.11. Late Payments. If either party fails to pay the other any
-------------
amounts when due under this Agreement, the amounts due will bear interest from
the due date to the date of payment at the annual rate publicly announced from
time to time by Bank of New York as its prime rate (the "Prime Rate") plus 3%,
adjusted as and when changes in the Prime Rate are made.
13.12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed an original.
13.13. Entire Agreement. This Agreement amends and restates the Asset
----------------
Exchange Agreement dated August 16, 1996, to which the parties hereto are
parties. With the exception of the Schedules referenced herein, this Agreement
(including the Exhibits referred to in this Agreement, which are incorporated in
and constitute a part of this Agreement) contains the entire agreement of
62
<PAGE>
the parties and supersedes all prior oral or written agreements and
understanding with respect to the subject matter, including the August 16, 1996
Asset Exchange Agreement. All references herein to the Schedules shall for all
purposes be deemed to refer to the Schedules delivered with the Asset Exchange
Agreement dated August 16, 1996, as updated and amended pursuant to Section
7.25, which Schedules, as amended, are incorporated in and constitute a part of
this Agreement. This Agreement may not be amended or modified except by a
writing signed by the parties.
13.14. Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable will be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining rights
of the Person intended to be benefited by such provision or any other provisions
of this Agreement; provided however that the economic and legal substance of the
transactions contemplated by this Agreement is not affected in any manner that
is materially adverse to any party affected by such invalidity or
unenforceability.
13.15. Construction. This Agreement has been negotiated by Transferee
------------
and Transferor and their respective legal counsel, and legal or equitable
principles that might require the construction of this Agreement or any
provision of this Agreement against the party drafting this Agreement will not
apply in any construction or interpretation of this Agreement.
63
<PAGE>
The parties have dated this Agreement as of the day and year first above
written
HERITAGE CABLEVISION OF SOUTH EAST
MASSACHUSETTS, INC.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Vice President
HERITAGE CABLEVUE, INC.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Vice President
TCI CABLEVISION OF ST. BERNARD, INC.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Vice President
TCI OF COUNCIL BLUFFS, INC.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Vice President
TCI OF VIRGINIA, INC.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Vice President
64
<PAGE>
UA-COLUMBIA CABLEVISION OF
MASSACHUSETTS, INC.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Vice President
UNITED CABLE TELEVISION OF SARPY
COUNTY, INC.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Vice President
UNITED CABLE TELEVISION OF
SCOTTSDALE, INC.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Vice President
TCI AMERICAN CABLE HOLDINGS, L.P.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Vice President
COXCOM, INC.
By: /s/ John M. Dyer
------------------------------
Name: John M. Dyer
Title: Vice President
65
<PAGE>
EXHIBIT 10.20
THIS AGREEMENT is made 1997
BETWEEN
(1) FLEXTECH P.L.C. (the "Company"); and
(2) COX COMMUNICATIONS INC ("Cox").
WHEREAS
(A) The Company is a public limited company incorporated in England and has an
authorised share capital at the date hereof of (Pounds)16,100,000 divided
into 150,000,000 Ordinary Shares of 10p each of which 110,759,497 are in
issue and fully paid or credited as fully paid, 5,000,000 convertible non-
preferred shares of 10p each of which 4,675,082 are in issue and fully paid
or credited as fully paid and 6,000,000 'A' convertible non-preferred
shares of 10p each of which 5,792,008 are issued and fully paid or credited
as fully paid.
(B) Prior to completion of its acquisition of the Programming Shares, the share
capital of the Company will be reorganised so that it consists of (Pounds)
[ ] divided into [ ] Ordinary Shares of 10p each and one special voting
share of 10p.
(C) The Company has agreed to issue and allot to Cox the Consideration Shares
in exchange for the transfer by Cox to the Company of the Programming
Shares on the terms and conditions contained in this Agreement.
IT IS AGREED as follows:
I. INTERPRETATION
A. In this Agreement the following expressions shall, unless otherwise
specified or the context otherwise requires, having the meanings set
opposite them respectively:
"ACCOUNTS" means the published audited accounts of the Company and the
consolidated accounts (including the directors' report and
notes) of the Company and its subsidiary undertakings for
the year ended 31 December 1995;
"ADMISSION" means admission of the Consideration Shares to the
Official List of the London Stock Exchange in
accordance with the Listing Rules;
"ADVERSE CONSEQUENCES" means all actions, suits, proceedings,
hearings, investigations, charges, complaints,
claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, duties,
penalties, fines, reasonable costs, amounts
paid in settlement, Liabilities, obligations,
liens, losses, reasonable expenses and fees
including court costs and attorney's fees and
expenses but, for the avoidance of doubt,
excluding any liabilities in the nature of
Taxation;
<PAGE>
"ARTICLES" means the new articles of association of the Company to be
adopted at the Extraordinary General Meeting;
"ASSOCIATE" means in relation to any company, another company which is
a subsidiary of, or holding company of, or another
subsidiary of a holding company of, that company except in
Clauses 10, 11 and 12 in relation to Cox, where it means
any company which is Controlled by Cox;
"BANK ACCOUNT" means Cox programming's bank account with National
Westminster Bank plc (a/c no. ) *** and Piccadilly Branch.
"BBC JOINT VENTURE
AGREEMENT" means the subscription and shareholders' agreement dated of
even date herewith between (1) the Company (2) Flextech [ ]
Limited (3) BBC Worldwide Limited and (4) [Newco Limited];
"BBC SUBSCRIPTION
AGREEMENT" means the subscription agreement between the Company and
BBC Worldwide Limited of even date with this Agreement;
"BROADCASTING
ACTS" means the Broadcasting Act 1990 and the Broadcasting Act
1996 and any regulations made thereunder;
"BUSINESS
DAY" means a day (other than on a Saturday or a Sunday) on which
banks are open for business in London;
"CIRCULAR" means the circular in the form of the draft attached hereto
marked "A" and initialled for the purposes of
identification by or on behalf of each of the parties
hereto to be sent to the holders of Existing Shares
comprising listing particulars relating to the Company and
which includes the notice convening the Extraordinary
General Meeting and details of, inter alia, the issue of
the Consideration Shares;
"CLAIM" or "CLAIM
FOR TAXATION" means any notice, demand, assessment, letter or other
document issued or action taken by or on behalf of the
Inland Revenue or Customs and Excise or any other statutory
or governmental authority or body whatsoever in any part of
the world from which it appears that a Liability to
Taxation is or will or may come to be imposed on Cox
Programming whether or not such Liability to Taxation is
primarily imposed upon or payable by Cox Programming and
whether or
<PAGE>
not Cox Programming has or may have any right of relief or
reimbursement;
"CLOSE OF BUSINESS" means 5 p.m. on the relevant Business Day;
"COMPLETION" means the completion of the transfer of the Programming
Shares and of the Programming Debt and the issue of the
Consideration Shares hereunder in each case in accordance
with the provisions of Clauses 6 and 7 of this Agreement;
"CONSIDERATION SHARES"
means [ ] new Ordinary Shares;
"CONTROL" shall have the meaning given to it in paragraph 1 of part 1
of schedule 2 to the Broadcasting Act 1990 as amended by
Part I of Schedule 2 to the Broadcasting Act 1996;
"COX INTERESTS" means the Gold Interests and the Living Interests;
"COX PROGRAMMING" means Cox Programming Limited (registered number 2710978)
which is in the course of changing its name to [ ];
"DIRECTORS" means the directors of the Company for the time being and
from time to time;
"EVENT" means any transaction, action or omission of any person and
any event or occurrence of whatever nature, whether or not
in the ordinary course of business and shall include
Completion;
"EXISTING SHARES" means the
110,759,497 Ordinary Shares 4,675,082 convertible non-
preferred shares and 5,792,008 'A' convertible non-preferred
shares of the Company in issue at the date of this
Agreement;
"EXTRAORDINARY
GENERAL MEETING" means the extraordinary general meeting of the Company to be
convened pursuant to the notice of extraordinary general
meeting to be set out in the Circular;
"FSA" means the Financial Services Act 1986;
"GOLD INTERESTS" means the Gold Shares and the Gold Loan Stock;
"GOLD LOAN STOCK" means the (Pounds)[12,517,089] nominal value of floating
rate redeemable unsecured loan stock in UK Gold held by Cox
Programming;
"GOLD SHARES" means the 5,687 ordinary shares of (Pounds)1 each in the
capital of UK Gold held by Cox Programming;
"GROUP" means the Company and its subsidiary undertakings at the
date hereof;
"LIABILITY" means any liability whether known or unknown, whether
asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or
unliquidated and whether due or to become due, but excluding
any Liability to Taxation.
<PAGE>
"LIABILITY TO
TAXATION" means any liability of Cox Programming to make any payment
of or in respect of Taxation;
"LICENCES" means the licences granted under the Broadcasting Act 1990
set out in the schedule to this Agreement together with any
other such licences granted under the Broadcasting Act 1990
to the Company, any subsidiary of the Company, any body
under the Control of the Company and any services licensed
under the Broadcasting Act 1990 operated by the Company
under a management or other agreement between the Company
and the relevant licensee;
"LISTING RULES" means the Listing Rules of the London Stock Exchange made
pursuant to Part IV of the FSA as set out in the publication
produced by the London Stock Exchange entitled "The Listing
Rules";
"LIVING INTERESTS" means the Living Shares and the Living Loan Stock;
"LIVING LOAN STOCK" means the (Pounds)11,579,450.63 nominal value of floating
rate redeemable unsecured loan stock in UK Living held by
Cox Programming;
"LIVING SHARES" means the 59,500 ordinary shares of 1p each in the capital
of UK Living held by Cox Programming;
"LONDON STOCK
EXCHANGE" means the London Stock Exchange Limited;
"ORDINARY SHARES" means ordinary shares of 10p each in the capital of the
Company having the rights set out in the Articles;
"PEARSON AGREEMENT" means the subscription agreement between the Company and
Thames Television Limited of even date with this Agreement;
"PRESS ANNOUNCEMENT"means the press announcement giving details of the
Subscription in the form of the draft attached hereto and
marked "B" and initialled for the purposes of identification
by or on behalf of each of the parties hereto;
"PROGRAMMING SHARES"means all the issued ordinary shares of (Pounds)1 each in
the capital of Cox Programming;
"RESOLUTIONS" means the resolutions of the Company in the form of the
draft attached hereto marked "C" and initialled for the
purposes of identification by or on behalf of each of the
parties hereto;
"SUBSCRIPTION" means the transfer by Cox of the Programming Shares and the
Programming Debt in exchange for the issue by the Company of
the Consideration Shares in each case on the terms and
conditions of this Agreement;
"SUBSIDIARY
UNDERTAKING" shall have the meaning set out in section 258 of the
Companies Act 1985;
"TAXATION" means all forms of taxation and duties in the nature of
taxation whatsoever and whenever imposed and whether of the
United Kingdom or elsewhere and without prejudice to the
generality of the foregoing includes income tax, corporation
tax, advance corporation tax, capital gains tax, stamp duty,
stamp duty reserve tax, value added tax, national insurance
and social security contributions and any payment whatsoever
which Cox Programming may be or become bound to make to any
person, revenue, customs or fiscal authority or any other
<PAGE>
body or authority as a result of any enactment relating to
Taxation and any other taxes and duties supplementing or
replacing any of the foregoing;
"TRANSFER" means (other than in accordance with Clauses 10.2 or 10.3)
any sale, transfer (whether voluntary or otherwise) or other
disposition of any shares in a company or any interest
(legal or beneficial) therein including, but without
limitation, the creation of any trust, charge or option over
such shares;
"UK GOLD" means UK Gold Television Limited;
"UK LIVING" means UK Living Limited.
B. In this Agreement, unless otherwise specified or the context otherwise
requires:
1. reference to this Agreement shall include the Recitals;
2. reference to a Clause is to a Clause of this Agreement;
3. words importing any gender shall include the other genders;
4. words importing natural persons shall include corporations and vice
versa;
5. words importing the singular shall include the plural and vice
versa;
6. words importing the whole shall be treated as including a reference
to any part thereof;
7. any word or expression the definition of which is contained or
referred to in the Companies Act 1985 or the Companies Act 1989 or
the FSA shall be construed as having the meaning thereby attributed
to it (the definition in the FSA to prevail where the same expression
is defined in either or both of such Companies Acts and the FSA);
8. references to any statute, regulation or part thereof shall be
construed as references thereto as amended or re-enacted or as the
application thereof is modified by other provisions from time to time
before the date of this Agreement, shall be construed as including
references to any provision of which they are re-enactments (whether
with or without modification) and shall be construed as including
references to any order, instrument, regulation or other subordinate
legislation made pursuant thereto; and
<PAGE>
9. references to dates and times are to London dates and times.
C. Where any obligation under this Agreement is expressed to require
performance within a specified time limit that obligation shall continue to
be binding and enforceable after the expiry of that time limit if the party
so obliged fails to perform that obligation within that time limit (but
without prejudice to all rights and remedies available against such party
by reason of such party's failure to perform that obligation within the
time limit).
D. In construing this Agreement the ejusdem generis rule shall not apply and
accordingly the interpretation of general words shall not be restricted by
being preceded by words indicating a particular class of acts, matters or
things or being followed by particular examples.
E. In this Agreement the headings to Clauses and in the Schedule are inserted
for convenience only and shall not affect the construction of this
Agreement.
II. CONDITIONS PRECEDENT
A. The provisions of this Agreement are conditional upon:
1. the Circular having been approved by or on behalf of the London Stock
Exchange in accordance with the requirements of the Listing Rules before
being delivered to the Registrar of Companies in accordance with the
provisions of paragraph 2.1.2;
2. one copy of the Circular having been delivered by or on behalf of the
Company to the Registrar of Companies in England and Wales for registration
in accordance with the provisions of section 149 of the FSA;
3. the Resolutions having been duly passed without amendment at the
Extraordinary General Meeting not later than 31 March 1997;
4. the provision of evidence, in form and substance reasonably acceptable to
the Company and Cox, that either notification of the issue of the
Consideration Shares and of any changes in Directors has been made in
respect of each of the Licences and that the Independent Television
Commission is not minded to revoke that Licence or that such notification is
not required to be made;
5. each of the Amendment Agreements, the Pearson Agreement, the BBC
Subscription Agreement and the BBC Joint Venture Agreement not having been
amended and each of them having become unconditional save for any condition
<PAGE>
relating to this Agreement or any of these other agreements becoming
unconditional;
6. Admission taking place not later than [1 April] 1997 or such later date
as the Company and Cox may agree;
7. Cox not having discovered that the financial or business information
concerning any member of the Group as publicly disclosed by the Company
(including, without limitation, in the Press Announcement, the Circular
and/or the Accounts) contains a misrepresentation of fact or omits to state
a fact necessary to make the information contained therein not misleading,
where the misrepresentation or omission is material in the context of the
Subscription; and
8. the Company delivering to Cox at close of business on the last business
day prior to Admission, a certificate signed by a Director in the form of
that set out in Schedule 3 confirming, inter alia, that the Company is not
aware of any circumstances giving rise or likely to give rise to a right for
Cox to terminate its obligations under this Agreement in accordance with its
provisions;
B. Each of the Company and Cox undertakes to the other (so far as it is legally
able) to use its reasonable efforts to ensure that the conditions set out in
Clause 2.1 (other than Clause 2.1.1) are satisfied as soon as practicable but in
any event before 31 May 1997.
C. If the conditions set out in Clause 2.1 have not been satisfied by 31 May
1997 then this Agreement shall terminate on that date and neither party shall
have any liability to the other party save in respect of prior breaches of the
terms hereof.
D. Flextech undertakes that it will not, and it will procure that no subsidiary
undertaking of it will, prior to Admission or the date on which this Agreement
ceases to be capable of becoming unconditional in accordance with its terms
(whichever shall be earlier):
1. allot or agree (conditionally or unconditionally) to allot any security
to any person other than (i) in accordance with the terms of a contractual
commitment existing prior to signature of this Agreement and in respect of
which details are disclosed in the Circular or (ii) in connection with the
Pearson Agreement or (iii) in connection with the BBC Subscription Agreement
or (iv) in connection with the exercise of employee options;
<PAGE>
2. enter into any agreement or arrangement (whether legally enforceable or
not) between any member of the Group and any person who is a "related party"
of the Company under the Listing Rules;
3. enter into any agreement or arrangement which would be material in the
context of the Group as a whole or amend or vary in a material manner the
terms of any agreement or arrangement to which any member of the Group is a
party and which is material in the context of the Group as a whole.
III.DOCUMENTS, FILINGS AND PUBLICATION
A. The Company shall:
1. deliver, or procure the delivery of, the Press Announcement to the London
Stock Exchange not later than 8.30 a.m. on [ ] 1997; and
2. use all reasonable endeavours to despatch, or procure the dispatch of,
the Circular to the holders of Existing Ordinary Shares as soon as possible
but in any event no later than [ ] 1997 together with the form of proxy for
use by such shareholders.
IV. SALE AND PURCHASE OF THE PROGRAMMING SHARES
A. With effect from Completion, Cox shall sell or procure the sale of, and the
Company shall purchase, the Programming Shares.
B. The Programming Shares shall be sold free from any option, lien, charge or
encumbrances and with all rights attached thereto at Completion.
V. CONSIDERATION
A. The consideration for the sale of the Programming Shares by Cox to the
Company shall be the allotment by the Company, credited as fully paid, of the
Consideration Shares to Cox.
B. The Consideration Shares shall be allotted free from any option, lien,
charge or encumbrance and with all rights attached thereto at Completion and on
terms that they will rank pari passu in all respects with the existing issued
Ordinary Shares.
C. The allotment and issue of the Consideration Shares shall be made on the
terms and subject to the conditions contained in this Agreement and on the basis
of the warranties set out in Clause 8 and the information set out in the
Circular.
<PAGE>
VI. COMPLETION
A. Completion shall take place at 3.00 p.m. on the Business Day following
satisfaction of the last of the conditions set out in Clause 2.1 (other than
Clause 2.1.6) or on such date as may be agreed between the parties at the
offices of Wiggin and Co, London or at such other place as may be agreed between
the parties.
B. At Completion all of the following shall take place (conditionally upon
each of the other steps having taken place):
1. Cox shall deliver to the Company:
a) a certified copy of resolutions of the board of directors of Cox
resolving to enter into and perform its obligations under this
Agreement;
b) duly executed transfers of the Programming Shares in favour of the
Company or its nominee together with the definitive certificates in
respect thereof;
c) such waivers, consents or documents as may reasonably be required by
the Company to vest in the Company the full beneficial ownership of the
Programming Shares; and
d) the certificate of incorporation, common seal, all statutory and
minute books (which shall be written up to, but not including the date
of Completion) and share certificate book of Cox Programming together
with all unused share certificate forms;
e) the definitive certificates in respect of the Cox Interests or an
indemnity in respect of the same on such terms as the Company may
reasonably require;
f) the written resignations of all directors of and the secretary of Cox
Programming executed as a deed in a form reasonably required by the
Company;
g) notice of resignation of the existing auditors of Cox Programming
containing statements as specified in Section 394 of the Companies Act
1985;
<PAGE>
h) the notice required pursuant to Section 198 of the Companies Act 1985
in respect of its interest in the Company following the issue of the
Consideration Shares; and
2. Cox shall procure that the following business is transacted at a meeting of
the board of directors of Cox Programming or by written resolution of the
directors of Cox Programming:
a) the directors of Cox Programming shall approve the transfer of the
Programming Shares for registration and the entry of the transferee in
the register of members of Cox Programming, subject only to the transfer
being subsequently presented duly stamped;
b) the situation of the registered office of Cox Programming shall be
changed to that nominated by the Company;
c) any person nominated by the Company for appointment as a director or
secretary of Cox Programming shall be so appointed;
d) KPMG shall be appointed to replace the existing auditors of Cox
Programming; and
e) the mandate relating to the Bank Account shall be modified in such
manner as the Company may reasonably require.
3. the Company shall deliver to Cox:
a) a certified copy of the resolutions of the Board of Directors of the
Company resolving to enter into and perform its obligations under this
Agreement and to allot the Consideration Shares to Cox and that Ajit
Dalvi be appointed to the Board of Directors of the Company pursuant to
the Articles;
b) share certificates in respect of the Consideration Shares;
and
<PAGE>
c) written confirmation that the conditions set out in Clause
2.1 other than those in 2.1.6 and 2.1.7 have been satisfied;
and
4. the Company shall procure Cox's registration as holder of the
Consideration Shares at a meeting of the Directors.
C. Cox shall procure that, at Completion, Cox Programming shall have not less
than (Pounds)1,660,479 in the Bank Account. The Company acknowledges that Cox
Programming has an opportunity to purchase losses of up to (Pounds)1,130,000
from European Channel Management Limited at a price of 24 pence for every
(Pounds)1.00 of losses purchased and:
(a) the Company consents to Cox Programming purchasing those losses at that
price in the period prior to Completion (and if any such purchase is made,
Cox's obligations under this Clause 6.3 to procure that not less than
(Pounds)1,660,479 is contained in the Bank Account at Completion shall be
reduced by reference to the purchase monies for those losses);
(b) if no such purchase is made prior to Completion, the Company agrees that if
Cox so requests following Completion, the Company will promptly cause Cox
Programming to purchase those losses at that price.
D. Neither party shall be obliged to complete this Agreement unless the other
shall have complied in full with its obligations under clause 6.2.
VII. APPOINTMENT OF DIRECTORS
A. At Completion the appointment of Mr Ajit Dalvi as a Director appointed
pursuant to article [ ] of the Articles will take effect.
B. Cox undertakes to the Company to consult with the Company prior to
exercising its right to appoint a Director pursuant to Article [ ] of the
Articles and not to exercise such right of appointment so as to, in the
reasonable opinion of the Company, in any way adversely affect any form of
regulatory consent or licence under which the Company carries out its business
or lead directly or indirectly to any modification of such consent or licence.
VIII. WARRANTIES BY THE COMPANY
A. The Company warrants to Cox that:
1. every statement of fact contained in the Press Announcement and in the
Circular is true and accurate in all material respects and is not materially
misleading in any respect;
<PAGE>
2. every statement of opinion, intention or expectation contained in the
Press Announcement or in the Circular is truly and honestly held by the
Directors and has been made by the Directors after due and careful
consideration and enquiry;
3. neither the Press Announcement nor the Circular omits anything likely
materially to affect the import of the information contained therein;
PROVIDED THAT in 8.1.1, 8.1.2 and 8.1.3 above, the warranties shall
not extend to information which is descriptive of Cox;
4. the Circular (including the listing particulars comprised in the
Circular) complies with section 146 of the FSA, the Listing Rules (save as
excepted by the London Stock Exchange under any letter of derogation) and
with all other applicable statutory and other legal and/or regulatory
provisions;
5. there are no facts or considerations known or which should have been
known to the Company or any of the Directors which are not disclosed in the
Press Announcement and/or the Circular which would or might reasonably be
considered to be material for disclosure to Cox as a subscriber or potential
subscriber for the Consideration Shares;
6. the Accounts give a true and fair view of the assets and liabilities,
reserves and profits and state of affairs of the Company and its subsidiary
undertakings as at and to the date thereof, comply with the requirements of
the Companies Act 1985 and have been prepared in accordance with generally
accepted accounting principles;
7. the Company's preliminary results for the period ended on 31 December
1996 were prepared with all due care and attention and were carefully
compiled on a basis consistent with the accounting policies and principles
applied in the preparation of the Accounts;
8. all statements of fact contained in the preliminary results
referred to in Clause 8.1.7 were true and accurate in all material
respects and were not misleading when published and all expressions
of opinion, intention and expectation contained in those interim
results concerning the financial position or prospects of the members
of the Group were made on reasonable grounds after due and careful
consideration, were honestly held and fairly based;
<PAGE>
9. save as disclosed in writing to Cox in a letter from the Company dated
of even date herewith] there are no legally binding agreements between any
member of the Group and any person who has a notifiable interest in the
share capital of the Company (within the meaning of section 199 of the
Companies Act 1985) or, so far as the Company is aware, any Associate of any
such person;
10. save as disclosed in the Circular, since 31 December 1995 the Company
and its subsidiary undertakings have carried on their respective businesses
in the ordinary and usual course and there has been no material adverse
change in the financial or trading position or prospects of the Company and
its subsidiary undertakings taken as a whole and the Company has complied
with the Listing Rules as regards the disclosure of information;
11. so far as known to any of the Company or the Directors, no circumstances
have arisen, such that any person is, or with the giving of notice would be,
entitled to require payment of any indebtedness of the Company or any of its
subsidiary undertakings before its due date for payment nor are the Company
or any of its subsidiary undertakings in breach of any of the terms of any
agreements relating to any of its immediate or long-term indebtedness or
borrowing facilities;
12. save as disclosed in the Circular, neither the Company nor any of its
subsidiary undertakings is engaged in any legal or arbitration or other
proceedings which individually or collectively may have, or have had during
the 12 months preceding the date of this Agreement, a significant effect on
the financial position of the Company and its subsidiary undertakings or be
material in the context of the Subscription or other transactions
contemplated in the Circular and no such proceedings are pending or
threatened against the Company, any of its subsidiary undertakings or any
person for whom any of them is vicariously liable nor is the Company or any
of its subsidiary undertakings or any of the Directors aware (having made
all reasonable enquiries) of any circumstances which are likely to give rise
thereto;
13. neither the Company nor any of the Directors is aware of the invalidity
or grounds for rescission, avoidance or repudiation of any agreement or
other transaction to which any member of the Group is a party and which is
material in the context of the Group as a whole or any circumstances likely
to give rise to the same and no member of the Group has received notice of
any intention to terminate any such agreement or repudiate or disclaim any
such transaction;
<PAGE>
14. subject to the passing of the Resolutions, the Directors and the Company
have full power and authority to carry into effect the creation and
allotment of the Consideration Shares and the creation and allotment of the
Consideration Shares will not infringe or exceed any limits, powers or
restrictions contained in any contract, obligation or commitment of the
Company and/or any of its subsidiary undertakings and will not contravene
the memorandum and articles of association of the Company;
15. the allotment and issue of the Consideration Shares will comply with the
FSA, the Companies Acts 1985 and 1989, the rules and regulations of the
London Stock Exchange and all applicable laws and governmental regulations
of the United Kingdom, and will not cause any material breach of any
provision of any agreement to which the Company or any of its subsidiaries
is a party or by which it is bound and will not result in any material
indebtedness of the Company or any subsidiary becoming payable prior to
maturity or any third party having a right to terminate any material
contract with the Company or any of its subsidiaries or exercise any rights
or options to acquire any assets or rights of the Company or its
subsidiaries or to terminate such rights or to cease to make available to
the Company or its subsidiaries any services or goods and all
authorisations, approvals, consents and licences required by the Company
have been obtained and are in full force and effect to permit the Company to
allot and issue the Consideration Shares and to enter into and complete this
Agreement;
to the best of the knowledge, information and belief of the
Directors, all information given by, or on behalf of, the Company to
Cox, its advisers or agents in connection with the Company or any of
its subsidiaries or the business or financial affairs thereof was
given in good faith and no further information has been withheld the
absence of which would make misleading the information so provided in
any material respect.
<PAGE>
B. Each of the warranties set out in Clause 8.1 ("Company Warranties") shall be
construed as a separate warranty and shall not be limited or restricted by
reference to or reference from the terms of any other Company Warranty or any
other term of this Agreement.
C. The Company's liability in respect of the Company Warranties shall not
exceed []
D. The Company shall immediately disclose to Cox in writing any matter or thing
which may arise or become known to it after the date of this Agreement which is
inconsistent with any of the Company Warranties or which might render any of
them misleading.
IX. WARRANTIES AND UNDERTAKINGS BY COX
A. Cox warrants to the Company that:
1. it has full corporate authority to enter into this Agreement and the
performance of its obligations hereunder will not infringe the terms of any
deed or agreement to which Cox is a party or by which it is bound which
would prevent Cox from fulfilling its obligations under this Agreement;
2. Cox is not prevented by the terms of the Broadcasting Act 1990 (as
amended by the Broadcasting Act 1996) or any other form of relevant
regulation from holding any or all of the Consideration Shares;
3. the warranties set out in Schedule 2 are true and accurate ("Cox
Warranties").
B. Each of the Cox Warranties shall be construed as a separate warranty and
shall not be otherwise limited or restricted by reference to or reference from
the terms of any other Cox Warranty or any other term of this Agreement.
<PAGE>
C. Cox shall immediately disclose to the Company in writing any matter or thing
which may arise or become known to it after the date of this Agreement which is
inconsistent with any of the Cox Warranties or which might render any of them
misleading.
D. Cox shall procure that the Cox Warranties are true and accurate as at
Completion and, for this purpose, the Cox Warranties shall be deemed to be
repeated at Completion and any express or implied reference therein to the date
of this Agreement shall be replaced by a reference to the date of Completion.
E. Cox agrees with the Company (acting as trustee and agent of Cox Programming)
to indemnify Cox Programming against any liability Cox Programming may owe to
any person:
(a) other than a Liability to Taxation;
(b) other than any liability Cox Programming may have to any person under
the existing shareholders' agreement for UK Gold or under the
existing shareholders' agreement for UK Living;
(c) other than any liability entered into and/or created and/or incurred
at any time following Completion.
F. Cox agrees with the Company (for itself and as trustee and agent of Cox
Programming and each of the Company's subsidiary undertakings) to indemnify the
Company and each of its subsidiary undertakings against any Adverse Consequences
which it may suffer as a result of Cox Programming owing any liability to any
person in respect of which the indemnity contained in Clause 9.5 applies.
G. The provisions of Schedule 4 shall apply to any claim in respect of the Cox
Warranties or under Clauses 9.5 or 9.6.
H. The provisions of Schedule 5 shall have effect in relation to Taxation.
I. The rights and remedies of the Company and/or Cox Programming under the
foregoing provisions of this Clause 9 shall not be affected by Completion, by
any investigation made by or on behalf of the Company into the affairs of Cox
Programming, by the giving of any time or other indulgence by the Company to any
person, by the Company rescinding or not rescinding this Agreement or by any
other cause, whatsoever except a specific waiver or release by the Company in
writing; and any such waiver or release shall not prejudice or affect any
remaining rights or remedies of the Company.
J. Cox undertakes to the Company that:
<PAGE>
1. it will supply to the Company, for the purposes of drafting any
supplementary listing particulars relating to the Subscription, such
information regarding Cox or any other member of the Cox group as may
reasonably be required to be included by the Company in such supplementary
listing particulars; and
2. until 1 September 1997 it will not appoint Mr Ajit Dalvi as a director
pursuant to article [ ] of the Articles unless he has taken responsibility
for the Circular as required by the Listing Rules.
K. Cox warrants to the Company that the information relating to it in the
Press Release and the Circular is accurate in all material respects.
X. POST-COMPLETION UNDERTAKINGS BY COX
A. Save for a Transfer pursuant to and in accordance with the provisions of
Clauses 10.2 and 10.3, Cox undertakes to the Company that no Transfer or
purported Transfer of Ordinary Shares will be made by Cox in the period from
Completion to the second anniversary of Completion ("the Restricted Period").
B. Subject to the provisions of this Clause 10.2, Cox may transfer Ordinary
Shares to an Associate during the Restricted Period, provided that:
1. it shall be a condition precedent to such Transfer that Cox and the
transferee enter into a deed of undertaking with the Company in such form as
the Company may reasonably require that:
a) the transferee shall be bound by the provisions of this Clause 10 as
if it were the original party to this Agreement and, where the context
so permits, as if each reference herein to Cox were a reference to the
transferee in place thereof; and
b) if the transferee shall cease to be Cox's Associate, then Cox shall
procure that the transferee transfer back to Cox or to Cox's Associate
(which shall enter into a deed of undertaking pursuant to this Clause
10.2) all of its Ordinary Shares prior to the date of such cessation.
C. Notwithstanding the provisions of Clause 10.1 during the Restricted Period
Cox and/or any Associate of it:
(a) may make a bona fide Transfer of Ordinary Shares to a bank by way of
security; or
<PAGE>
(b) may Transfer Ordinary Shares as a result of accepting a third party
offer for all the shares in the issued Ordinary Share capital of
Flextech (and shall be permitted to give an irrevocable undertaking
to accept such an offer); or
(c) may Transfer Ordinary Shares by way of sale to a bona fide third party
offeror for all the shares in the issued Ordinary Share capital of
Flextech; or
(d) may Transfer Ordinary Shares by way of repurchase of shares by
Flextech; or
(e) may sell any [?] rights or Ordinary Shares to which it becomes entitled in
respect of its holding of Consideration Shares as a result of any offer by
the Company to its shareholders to take up entitlements to ordinary shares
pro rata to their existing holdings.
D. After the Restricted Period, Cox shall give the Company's brokers from
time to time such notice as is reasonable in the circumstances of its intention
to sell any Ordinary Shares.
XI. PROTECTIVE COVENANT
A. In this Clause 11, "Competing Channel" means a satellite delivered
television channel broadcast primarily for reception in the United Kingdom and
which is directly competitive with one or more of the channels in which the
Company directly or indirectly holds a 50% or greater economic interest.
B. Cox undertakes to the Company that until the third anniversary of
Completion it shall not and shall procure that none of its Associates shall,
directly or indirectly carry on or be engaged or interested in a Competing
Channel. The restrictions in this clause 11.2 shall not prevent Cox and/or any
Associate of it from acquiring and/or holding any interest in a Competing
Channel which interest shall not comprise more than a 20% economic interest in
that Competing Channel. Neither shall they apply in respect of any interest held
by Cox and/or any Associate in Discovery Communications, Inc.
XII. OPERATIONS COMMITTEE
A. The Company undertakes to Cox that, save as provided in the Pearson
Agreement it will not grant to any other person the right to appoint a Director
or enter into any contractual agreement with any person to appoint as a Director
any person nominated by that or any other person unless that person owns at
least 5% of the issued ordinary share capital of the Company.
<PAGE>
B. The Company shall procure that there shall be set up a committee of the
Directors (the "Operations Committee") charged with responsibility for reviewing
the Company's strategy, plans and results. Any Director appointed by Cox
pursuant to the Articles will be entitled to be a member of the Operations
Committee for so long as Cox and/or its Associates (in aggregate) remain at
least the second largest shareholder in the Company.
C. The Operations Committee shall meet at least once in each calendar
quarter. The dates and times of these regular quarterly meetings for each
calendar year shall be established by the board of Directors at its first
meeting held during such calendar year. The Operations Committee shall also meet
at such other times as may be requested by any member thereof to deal with
matters which cannot reasonably wait to be dealt with at the next regular
quarterly meeting.
D. The members of the Operations Committee will be provided with all
appropriate information in order to enable the Committee to fulfill its
functions and will make such recommendations to the board of Directors as it
thinks fit.
XIII. RESCISSION
If at any time prior to this Agreement becoming unconditional:
1. there shall come to the notice of either party a breach of the
warranties by the other contained in this Agreement;
or
2. there shall come to the notice of either party a breach of any of the
obligations imposed upon the other pursuant to this Agreement;
and the breach is, in the reasonable opinion of the party not in breach,
material in the context of this transaction taken as a whole then and in any
such case the party not in breach may by notice to the other given verbally
(including by telephone) or by facsimile transmission or in writing rescind this
Agreement.
XIV. COSTS AND EXPENSES
Each of the parties hereto shall pay its own costs in relation to the
negotiations leading up to the preparation, execution and carrying into effect
of this Agreement.
XV. GENERAL
A. Notwithstanding the Subscription being effected, each and every right and
obligation of the parties under this Agreement shall, except in so far as then
fully performed, continue in full force and effect.
<PAGE>
B. Any provision of this Agreement which is expressed or intended to have
effect on, or to continue in force after, the termination of this Agreement
shall have such effect, or, as the case may be, continue in force, after such
termination.
C. No failure on the part of either party to exercise, and no delay on its
part in exercising, any right or remedy under this Agreement will operate as a
waiver thereof, nor will any single or partial exercise of any right or remedy
preclude any other or further exercise thereof or the exercise of any other
right or remedy.
D. Any right of rescission conferred by this Agreement shall be in addition
to and without prejudice to all other rights and remedies available to it. The
right of rescission shall terminate on Completion.
E. The rights and remedies of the parties under this Agreement are
cumulative and not exclusive of each other or of any other right or remedy.
F. Neither party shall make any press or media announcement or issue any
press or media release with respect to this Agreement or any matter contained
herein without obtaining the prior written consent of the other to the contents
thereof and the manner of its presentation and publication (which consent shall
not be unreasonably withheld or delayed).
G. This Agreement constitutes the entire agreement between the parties with
respect to the subject matter hereof and expressly excludes any warranty,
condition or other undertaking implied at law or by custom and supersedes all
previous agreements and undertakings between the parties with respect thereto
and each of the parties acknowledges and confirms that it does not enter into
this Agreement in reliance on any representation, warranty or other undertaking
not fully and expressly reflected in the terms of this Agreement.
H. No variations of this Agreement shall be effective unless made in writing
by the Company and Cox.
I. This Agreement shall be governed and construed in accordance with English
law.
J. Any notice or other communication to be given by one party to another
under, or in connection with the matters contemplated by, this Agreement shall
be communicated as follows:
(a) if to Cox, to : Cox Communications, 1400 Luke Hearn Drive,
Atlanta, Georgia, 30319, USA
Attention: Ajit Dalvi/Dallas Clement
<PAGE>
Fax No: 001 404 843 6542
with a copy to Frere Cholmeley Bischoff, 4 John Carpenter
Street, London EC4Y 0NH
Attention: Simon Morgan/Stephen Hermer
Fax No: 0171 615 8080
(b) if to the Company to: Flextech p.l.c., 160 Great Portland
Street, London W1N 5TB
Attention: Mark Luiz
Fax No: 0171 299 6000
with a copy to: Wiggin & Co, 3 Albany Courtyard, London, W1V
9RA
Attention: Stephen Cook/Alan Craig
Fax No: 0171 287 8628
or in each case to such other address, and/or facsimile number and/or marked for
such other attention as may from time to time be specified by the relevant party
to the other, by notice given in accordance with this Clause for the purposes of
this Clause.
K. Any notice or other communication to be given by one party to another,
under, or in connection with the matters contemplated by, this Agreement shall
be in writing and shall be given by letter delivered by hand or registered post
or by facsimile, and shall be deemed to have been received:-
1. in the case of delivery by hand or registered post prior to 5 p.m. on
a Business Day, when delivered and in any other case on the Business Day
following the day of delivery; or
2. in the case of facsimile where the transmission occurs prior to 5p.m.
on a Business Day, on acknowledgement by the addressee's facsimile
receiving equipment and in any other case on the Business Day following
the day of acknowledgement by the addressee's facsimile receiving
equipment.
<PAGE>
and for the purpose of this Clause 15.11, a "Business Day" shall mean a day on
which banks are open for business in the city where the recipient of the notice
is located.
L. Where any provision of this Agreement states that notice may be given
verbally (including by telephone) to the Company such notice shall take effect
immediately upon being given to an officer of the Company.
M. The Company has no plan or intention to sell, exchange or otherwise
dispose of any of the share capital of Cox Programming for a period of two years
following Completion, and has not entered into any legally binding agreement to
dispose of any of the shares of Cox Programming. The Company agrees that it will
not dispose of, and will not enter into any legally binding agreement to dispose
of, any of the shares of Cox Programming during the two years following
Completion. Following Completion, Cox Programming will continue as a holding
company, with a continuing significant investment in at least one business line
in which it is presently invested.
XVI. COMPETITION
No provision of this Agreement, or of an agreement or arrangement of which it
forms part, by virtue of which this Agreement, or and agreement or arrangement
which it forms part, is subject to registration under the Restrictive Trade
Practices Acts 1976 and 1977, shall take effect until the day after the date on
which particulars have been furnished to the Director General of Fair Trading in
accordance with various Acts.
XVII. COUNTERPARTS
This Agreement may be entered into in any number of counterparts and by the
parties to it in separate counterparts each of which when so executed shall be
original, but all the counterparts shall together constitute one and the same
instrument.
<PAGE>
SCHEDULE 1
THE LICENCES
<TABLE>
<CAPTION>
CHANNEL LICENCE NUMBER
<S> <C>
The Learning Channel NDS036
Discovery NDS017
Bravo NDS016
Parliamentary Channel NDS018
TCC NDS013
</TABLE>
Family Channel [ ]
<PAGE>
SCHEDULE 2
I. The copies of the memorandum and articles of association of Cox
Programming delivered to the Company prior to signing of this Agreement are true
and complete copies, having attached to them copies of all resolutions and
agreements referred to in Section 380(2) of the Companies Act 1985.
II. The statutory books and registers of Cox Programming are written up to
date and all such documents and other necessary records, deeds, agreements and
documents relating to its affairs are in its possession or under its control.
III. Cox Programming has complied in all material respects with all legal
requirements applicable to its business, whether in the United Kingdom or in any
other country.
IV. No person has the right to call for the issue of any share capital of Cox
Programming by reason of any conversion rights or under any option or other
agreement.
V. Other than the Cox Interests, Cox Programming has no interest in the
share capital or other securities of any other body corporate.
VI. Cox Programming has no employees and has never had any employees.
VII. As at Completion there will be no outstanding indebtedness of Cox
Programming to Cox or any of its Associates.
VIII. Cox is entitled to sell and transfer to the Company the full legal and
beneficial ownership of the Programming Shares free from any liens, charges, and
encumbrances on the terms of this Agreement, without the consent of any third
party.
IX. The Programming Shares constitute the entire issued share capital of Cox
Programming.
X. Cox Programming is the full legal and beneficial owner of the Cox
Interests.
<PAGE>
SCHEDULE 3
[LETTERHEAD OF THE COMPANY]
[to Cox]
[Date]
Dear Sirs,
We refer to the Subscription Agreement dated 1997 between us
relating to our acquisition of the Programming Shares and the Programming Debt
and the issue to you of the Consideration Shares (the "Agreement"). Words and
expressions defined in the Agreement have the same meanings in this letter.
We confirm to you that:
(a) the Company is not aware of any circumstances giving rise or likely to give
rise to a right for Cox to terminate its obligations under the Agreement in
accordance with its provisions;
(b) each of the conditions referred to in Clause 2.1 of the Agreement (save for
the condition in Clause 2.1.6 and 2.1.7) have been fulfilled in accordance
with their terms;
(c) the London Stock Exchange has granted permission for the Consideration
Shares (subject to allotment) to be admitted to the Official List of the
London Stock Exchange;
(d) having made enquiries of all appropriate persons, none of the warranties
referred to in Clause 8.1 of the Agreement was breached or untrue or
inaccurate or misleading in any material respect when made.
Yours faithfully,
-------------------------------------------
Director, duly authorised,
for and on behalf of
Flextech plc
<PAGE>
SCHEDULE 4
I. For the purpose of this Schedule a "relevant claim" shall mean all claims
made against Cox under or in connection with this Agreement including, but
not limited to:
(a) a claim by the Company under or in respect of the Cox Warranties; and
(b) a claim by or on behalf of Cox Programming in accordance with the
provisions of Clause 9.5 and/or Clause 9.6.
II. The Company undertakes to notify Cox in writing of any matter which comes
to its or Cox Programming's notice and which will or may give rise to a relevant
claim, such notification to be given promptly after the Company or Cox
Programming (as the case may be) first becoming of the matter or circumstances
giving rise to the relevant claim
III. Cox shall have no liability in respect of any relevant claim:
(a) to the extent that such liability arises or is increased as a result of
something done or omitted to be done before the date of this Agreement at
the written request or with the written approval of the Company;
(b) to the extent that such liability arises or is increased as a result
of something done or omitted to be done by the Company or by Cox
Programming after Completion other than in the ordinary course of
business which could reasonably have been avoided and where the
Company knew or ought reasonably to have known that such liability
would so arise or be so increased;
(c) to the extent that the sum in respect of which the relevant claim is
made is recovered by the Company or Cox Programming from any third
party and the Company and/or Cox Programming shall take such steps as
are reasonable in the circumstances to enforce such recovery provided
that they shall not be obliged to do anything which they reasonably
consider would be prejudicial to the interests of the Company and/or
Cox Programming.
IV. If the Company or Cox Programming becomes aware that any claim may be or
has been made against it which may result in Cox becoming liable to make a
payment to the Company or Cox Programming (as the case may be):
(a) the Company shall (in addition to giving notice under paragraph 2)
forthwith provide Cox with copies of all notices, correspondence,
<PAGE>
pleadings and other documents which either of them receives in
relation to the claim; and
(b) the Company shall not and shall procure that Cox Programming shall not
settle or compromise the claim or make any admission of liability without
Cox's prior consent, such consent not to be unreasonably withheld or
delayed.
(c) the Company shall consult with Cox in relation to all negotiations,
settlements, proceedings and appeals in respect of the claim, shall seek
(to the extent reasonably possible and commercially practicable) to
minimise Cox's financial exposure in respect of the claim and shall take
reasonable account of points made by Cox in relation thereto.
V. If Cox makes any payment to the Company or Cox Programming in respect of
any relevant claim or under Schedule 5 ("a Payment") and the Company or Cox
Programming (the "Recipient") subsequently recovers from any person any sum in
respect of the circumstances giving rise to that payment (a "Recovery"), to the
extent that the Recovery was not taken into account in determining the amount of
the Payment, the Company shall procure that the Recipient shall forthwith repay
to Cox an amount equal to so much of the Recovery (including any interest or
repayment supplement awarded on that sum) as does not exceed the aggregate
amount of the Payment less any costs incurred by the Recipient in recovery that
sum. If the Recovery is made by Cox Programming the obligations of the Recipient
under this paragraph shall only be to pay such part of the Payment made to the
Recipient as would not have been payable had Cox Programming had the benefit of
the Recovery (and had not subsequently incurred any cost in recovering the same)
prior to the assessment of the amount of the Payment due to the Recipient.
VI. Nothing contained in this Agreement shall be deemed to relieve the
Company from any common law duty to mitigate any loss or damage suffered by it.
VII. The Company and/or Cox Programming shall not be entitled to recover any
payment(s) from Cox in respect of the subject matter giving rise to any relevant
claim or any claim under Schedule 5 more than once.
VIII. Any payment made by Cox in respect of a relevant claim or under Schedule
5 shall be deemed to be a reduction of the consideration paid by the Company to
Cox under this Agreement.
IX. Cox's aggregate liability under this Agreement (including but not
limited to its liability in respect of each and all relevant claims) shall
not exceed [(Pounds)100,000,000]
<PAGE>
X. The provisions of this Schedule 4 shall not apply in respect of any Claim
for Taxation except for paragraphs 5,6,7, 8 and 9 of this Schedule 4.
<PAGE>
SCHEDULE 5
TAXATION
I. For the purposes of this Schedule 5:
A. any reference to any Event includes any Event which is deemed to have
occurred pursuant to any enactment relating to Taxation enacted prior to the
date hereof;
B. any reference to income, profits or gains earned, accrued or received
includes any income, profits or gains which are deemed to be earned, accrued or
received pursuant to any enactment relating to Taxation enacted prior to the
date hereof.
II. Subject to the provisions of this Schedule 5, Cox undertakes to pay to
the Company a sum equivalent to:
A. any Taxation for which Cox Programming is or may become liable in respect
of or arising from any Event occurring on or before Completion or by reference
to any income, profits or gains earned, accrued or received on or before
Completion EXCLUDING any Taxation and/or interest and/or penalties relating
thereto for which Cox Programming is or may become liable to the extent that
such Taxation consists of corporation tax on:
(a) interest accrued but unpaid on the Living Loan Stock for the period(s) 1
January 1993 to 31 December 1995 and which arises only on or after payment
of the relevant interest;
(b) interest accrued or paid on the Living Loan Stock for the period 1 January
1996 to 31 December 1996 and all subsequent periods;
(c) interest accrued or paid on the Gold Loan Stock for the period commencing
1 January 1993 and all subsequent periods, other than any interest on the
Gold Loan Stock paid prior to 1 January 1996;
(d) interest arising on the (Pounds)1,910,479 received in the Bank Account on
31 December 1996 (this sum representing a payment of interest on the Gold
Loan Stock).
B. all reasonable costs and expenses incurred by Cox Programming or the
Company in relation to or resulting from any demands, actions, proceedings
<PAGE>
and claims in respect of any Liability to Taxation in respect of or by
reference to which Cox is liable pursuant to paragraph 2.1 to make any
payment to the Company.
III. Cox shall not be liable under paragraph 2 of this Schedule 5:
A. if liability would arise or be increased as a result of something done or
omitted to be done before the date of this Agreement at the written request of
or with the written approval of the Company;
B. if and to the extent that any liability would not have arisen but for a
voluntary act or omission of the Company or Cox Programming after the date of
this Agreement otherwise than in the ordinary course of its business which could
reasonably have been avoided and which the Company was aware or should
reasonably have been aware would give rise to a claim under this Schedule 5;
C. to the extent that such liability arises from any change in accounting or
taxation policy or practice adopted by the Company on or after Completion;
D. to the extent that such liability arises or results from or as a
consequence of any change in the date to which Cox Programming makes up its
accounts or in its accounting period for the purposes of corporation tax;
E. to the extent that such liability has been made good or otherwise
compensated for at no expense to the Company or Cox Programming:
F. to the extent that such liability arises as a result of the withdrawal by
Cox Programming after Completion of any claims for consortium relief;
G. to the extent that such liability is a liability for corporation tas on a
chargeable gain arising on a disposal or deemed disposal by Cox Programming
after Completion which gain was, immediately before Completion, accrued but not
realised or deemed to have been realised on or before Completion.
IV. Any payment to be made by Cox under this Schedule 5 shall be made on I.or
before the relevant payment date, which shall be ascertained as follows:
A. insofar as that payment represents Taxation to be borne by Cox
Programming, the payment date shall be the last Business Day before the day on
which payment of the relevant Taxation is finally due; and
B. insofar as the payment represents a claim under paragraph 2.2 of this
Schedule 5, seven days after the date on which a notice setting out details of
the costs and expenses incurred for which a clause is being made is served on
Cox.
<PAGE>
V. No claim under or in respect of this Schedule 5 may be made unless
written notice detailing a specific ground for liability hereunder and providing
details of the claim shall have been given to Cox before the seventh anniversary
of Completion.
VI. The provisions of paragraphs 5,6,7 and 8 of Schedule 4 shall have effect
in respect of this Schedule.
A. If the Company or Cox Programming become aware of a Claim for Taxation
which could give rise to a liability under this Schedule 5, the Company shall
notify Cox in writing, specifying the nature of that Claim in reasonable detail
and annexing copies of any notices, correspondence or other documents relating
to such Claim. Subject to paragraph 7.2, the Company shall then take or procure
that Cox Programming shall take such action to avoid, resist, appeal or
compromise the Claim for Taxation as Cox may reasonably request.
B. Without prejudice to the generality of 7.1 the Company shall not, and
shall procure that Cox Programming shall not, settle or compromise the Claim for
Taxation or make any admission of liability in relation to it without the prior
written consent of Cox; and
C. Cox shall pay the Company or Cox Programming (as appropriate) all
expenses reasonably incurred by it in complying with its obligations under this
clause.
VII. The Company shall, at the direction in writing of Cox, procure that Cox
Programming takes all such steps as Cox may reasonably require to allow Cox to
reduce or eliminate any liability of Cox Programming to Taxation by claiming
consortium relief from any other company to the extent permitted by law for any
period (s) prior to the date of this Agreement.
A. Cox or its duly authorised agents shall prepare the Taxation returns of
Cox Programming for all accounting periods ended on or before 31 December 1996,
to the extent outstanding at Completion, and shall deal with all matters and
correspondence relating to those returns. The Company shall cause Cox
Programming to authorise, sign and submit the returns to the appropriate
authority without amendment or with such amendments as Cox shall agree, such
agreement not to be unreasonably withheld or delayed
B. The Company shall cause Cox Programming to provide Cox or its duly
authorised agents with such assistance as may reasonably be necessary for the
returns referred to in paragraph 9.1 to be prepared and agreed with the
appropriate authority.
C. The Company shall procure that the Taxation returns of Cox Programming
for its accounting period commencing 1 January 1997, and all documents and
<PAGE>
correspondence relating thereto, are submitted in draft to Cox or its duly
authorised agent for comment prior to the submission to the appropriate
authority. The Company shall procure that such reasonable comments and
amendments as Cox may have shall be incorporated prior to submission to the
appropriate authority where such comments and amendments are made without
unreasonable delay.
VIII. The Company shall and shall procure that Cox Programming shall, co-
operate to ensure that in respect of the respective accounting periods of
European Channel Management Limited ("ECM") and European Channel Broadcasting
Limited ("ECB") during which Cox Programming sold its shareholding in ECM and
ECB to a wholly-owned subsidiary of Cox ("Newco"), any consortium relief claim
by Newco for the surrender of losses by ECM and ECB shall take priority over any
claim which might have been available to Cox Programming for the same period.
IX. The Company shall procure that Cox Programming shall;
A. duly account to the Inland Revenue for tax which it is obliged to
withhold on interest payments to Cox and for which it is liable to account after
Completion; and
B. co-operate with Cox in the making of a claim under the US/UK double
taxation convention to recover such withholding tax.
SIGNED by ) /s/ Adam Singer
for and on behalf of FLEXTECH P.L.C ) ------------------------------------
Director
SIGNED by ) /s/ Ajit M. Dalvi
for and on behalf ) ------------------------------------
COX COMMUNICATIONS INC ) Senior Vice President
Programming & Strategy
<PAGE>
EXHIBIT 13
===============================================================================
Selected Consolidated Financial Data
===============================================================================
COX COMMUNICATIONS, INC.
The following selected historical financial information for each of the five
years in the period ended December 31, 1996 has been derived from and should be
read in conjunction with the Consolidated Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following selected pro forma data give effect to the Merger (as
defined herein) and related transactions as if they occurred on January 1, 1994.
The pro forma data do not purport to represent what Cox's results of operations
or financial condition would actually have been had the Merger occurred on such
date and are not necessarily indicative of future operating results or financial
condition.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Pro Forma
(Millions of Dollars, except per share data) 1996 1995 1994 1993 1992 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues $1,460.3 $1,286.2 $ 736.3 $ 708.0 $ 652.1 $1,328.1 $1,235.2
Operating income 221.7 226.0 139.8 179.7 179.2 231.3 219.8
Interest expense 146.1 132.3 46.1 12.9 13.4 140.1 148.9
Equity in net losses of affiliated companies 170.4 79.7 43.9 28.2 0.5 79.7 54.2
Gain on issuance of stock by affiliated companies 50.1 - - - - - -
Gain on sale of affiliated companies 4.6 188.8 - - - 188.8 -
Income (loss) before cumulative
effect of accounting changes (51.6) 103.8 26.6 77.1 93.0 101.2 (12.8)
Net income (loss) (51.6) 103.8 26.6 97.8 93.0 101.2 (12.8)
Net income (loss) per share $ (0.19) - - - - $ 0.39 $ (0.05)
Other Operating and Financial Data/(a)/:
Operating cash flow $ 556.9 $ 493.3 $ 268.5 $ 295.7 $ 275.1 $ 510.4 $ 473.6
Operating cash flow margin 38.1% 38.4% 36.5% 41.8% 42.2% 38.4% 38.3%
Debt to operating cash flow ratio 5.2x/(b)/ 5.2x 2.9x 2.0x 1.6x 5.0x 4.5x
Balance Sheet Data:
December 31,
(Millions of Dollars)
Total assets $5,784.6 $5,555.3 $1,874.7 $1,527.4 $1,300.2 $5,555.3 $4,460.7
Total debt (including amounts due to CEI) 2,881.0 2,575.3 787.8 595.6 428.7 2,575.3 2,150.9
...................................................................................................................................
Customer Data:
December 31,
Homes passed 5,016,749 5,005,858 2,878,857 2,838,197 2,745,491 5,005,858 4,956,055
Basic customers 3,259,384 3,248,759 1,851,726 1,784,337 1,722,007 3,248,759 3,126,634
Premium service units 2,000,673 1,827,068 1,203,606 1,205,587 1,249,673 1,827,068 1,984,561
Basic penetration 65.0% 64.9% 64.3% 62.9% 62.7% 64.9% 63.1%
PrimeStar customers 130,606 56,822 17,894 - - 56,822 17,894
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating cash flow (operating income before depreciation and amortization)
is a commonly used financial analysis tool for measuring and comparing cable
television companies in several areas, such as liquidity, operating
performance and leverage. Operating cash flow should not be considered by
the reader as an alternative to net income as an indicator of Cox's
performance or as an alternative to cash flows from operating activities as
a measure of liquidity.
(b) Using the fourth quarter annualized operating cash flow, the ratio was 4.9.
<PAGE>
===============================================================================
Management's Discussion And Analysis
===============================================================================
COX COMMUNICATIONS, INC.
Recent Acquisitions, Dispositions and Investments
U.S. Broadband Networks
On February 1, 1995, Cox Communications, Inc. ("Cox"), Cox Enterprises, Inc.
("CEI"), The Times Mirror Company ("Times Mirror") and New TMC Inc. ("New Times
Mirror") consummated a merger (the "Merger"), pursuant to which Times Mirror
(which, at the time of the Merger, was engaged only in the cable television
business) merged with and into Cox. In connection with the Merger, Cox Class A
Common Stock became publicly traded on the New York Stock Exchange. Following
the Merger, New Times Mirror changed its name to "The Times Mirror Company." As
a result of the Merger, the former Times Mirror stockholders received a total
of approximately 54,904,252 shares of Cox Class A Common Stock. Subsidiaries of
CEI received 181,296,833 shares of Cox Class A Common Stock and 13,798,896
shares of Cox Class C Common Stock.
In September 1995, Cox sold its cable television system serving
approximately 13,000 customers in Bullhead City, Arizona for $20 million. No
gain or loss resulted from this transaction.
In January 1996, Cox acquired a cable television system serving
approximately 51,000 customers in Newport News, Virginia, for approximately
$122.3 million. Cox operates this system as part of its cluster of systems in
the Hampton Roads, Virginia area.
In January 1996, Cox sold its cable television system in Texarkana,
Texas. The system, which was acquired as part of the Merger, served
approximately 23,400 customers. No gain or loss resulted from this transaction.
In April 1996, Cox exchanged its Williamsport, Pennsylvania cable
television system for $13 million and a cable television system in East
Providence, Rhode Island. The Williamsport system, which was acquired as part
of the Merger, served approximately 24,500 customers in Williamsport. The East
Providence system serves approximately 15,500 customers. No gain or loss
resulted from this transaction.
In April 1996, Cox sold certain cable television systems in the Ashland,
Kentucky and Defiance, Ohio area for $136 million. These systems, which were
acquired as a result of the Merger, together served approximately 78,600
customers. No gain or loss resulted from this transaction.
In October 1996, Cox and Time Warner Entertainment/Advance-Newhouse
("Time Warner") entered into an agreement whereby Cox agreed to exchange its
Myrtle Beach, South Carolina cable television system serving approximately
42,230 customers for Time Warner's Hampton and Williamsburg, Virginia cable
television systems serving approximately 45,300 customers. The transaction also
includes a Texas cable television system serving approximately 7,000 customers
to be purchased by Cox and then immediately traded to Time Warner. Cox
anticipates this transaction will be consummated during the first quarter of
1997. In addition, Cox anticipates that it will recognize a book gain on this
transaction.
In January 1997, Cox and Tele-Communications, Inc. ("TCI") exchanged
certain cable television systems owned by Cox serving approximately 319,000
customers for certain cable television systems owned by TCI serving
approximately 296,000 customers. As a result of the transaction, Cox received
TCI's systems in Bellevue/ LaVista, Nebraska and Council Bluffs, Iowa;
Chesapeake, Virginia; Scottsdale, Arizona; North Attleboro/Taunton,
Massachusetts; Lincoln, Rhode Island; and St. Bernard, Louisiana. In exchange,
TCI received Cox's systems in the greater Pittsburgh area; Spokane, Washington;
Springfield, Illinois; Cedar Rapids, Iowa and the Quad Cities area of Illinois
and Iowa; and Saginaw, Michigan. No gain or loss resulted from this transaction.
In January 1997, Cox and Continental Cablevision ("Continental"), which
manages the domestic cable properties of U S WEST Media Group, exchanged
certain cable television systems, each serving approximately 48,000 customers.
Cox received Continental's systems in James City and York County, Virginia and
Pawtucket, Rhode Island and Continental received Cox's systems in western
Massachusetts and Weymouth, Massachusetts. No gain or loss resulted from this
transaction.
<PAGE>
===============================================================================
Management's Discussion And Analysis (continued)
===============================================================================
COX COMMUNICATIONS, INC.
Telephony Investments
In October 1994, subsidiaries of Cox, TCI, Comcast Corporation ("Comcast")
and Sprint Corporation ("Sprint") formed a partnership known as"WirelessCo" to
engage in the business of providing wireless communications services, primarily
personal communication services ("PCS"). WirelessCo, of which Cox owns a 15%
interest, was the successful bidder for 29 broadband PCS licenses in the
auction conducted by the Federal Communications Commission ("FCC") from
December 1994 through March 1995. The total purchase price for the 29 licenses
was approximately $2.1 billion.
In March 1995, Cox, TCI, Comcast and Sprint formed Sprint Spectrum
Holding Company L.P. ("Sprint PCS") to which the partners contributed all of
their respective interests in WirelessCo. The partnership agreement of Sprint
PCS contemplates that the partners in the aggregate may be required to make cash
capital contributions (including cash contributions previously made to
WirelessCo) of up to $4.2 billion. Cox recorded $56.5 million, $7.9 million and
$0.5 million in equity of net losses of affiliated companies for the years ended
December 31, 1996, 1995 and 1994, respectively, for its ownership interest in
Sprint PCS and its predecessor, WirelessCo.
Cox also owns a 17.6% interest in "PhillieCo," a partnership formed by
subsidiaries of Cox, TCI and Sprint. PhillieCo was the successful bidder for a
broadband PCS license for the Philadelphia Major Trading Area ("MTA"). The
purchase price of the license was approximately $85 million.
Cox was the successful bidder for a broadband PCS license for the Omaha
MTA. The purchase price for the license was approximately $5.1 million. In
February 1997, with FCC approval Cox contributed the Omaha PCS license to
Sprint PCS.
Cox was awarded a broadband PCS license for the Los Angeles-San Diego
MTA under the FCC's pioneer preference program. The amount payable by Cox for
its license is $251.9 million and was included in outstanding debt at December
31, 1996.
In December 1996, pursuant to previous agreements, Cox, CEI, TCI,
Comcast and Sprint formed Cox Communications PCS, L.P. ("PioneerCo") to operate
the PCS system in the Los Angeles-San Diego MTA. PioneerCo is owned 49% by
Sprint PCS as limited partner and 51% by Cox Pioneer Partnership ("CPP") as
general partner. CPP is a jointly controlled partnership owned approximately 78%
by Cox and approximately 22% by CEI. Cox, as managing general partner of CPP,
has day-to-day management authority over PioneerCo. Upon FCC approval, which is
expected in the first quarter 1997, the PCS license for the Los Angeles-San
Diego MTA and the related obligation to the FCC will be transferred from Cox to
PioneerCo. Upon the earlier of December 31, 1997 or completion of the FCC's
buildout requirement, CPP has the right to put its interest to Sprint PCS at
fair market value over a five-year period. In addition, CPP has the right to put
its entire interest from the fifth through the eighth anniversaries of the
earlier of December 31, 1997 or completion of buildout, and Sprint PCS has a
call on CPP's interest from the fourth to the eighth anniversaries of completion
of the buildout requirement. Cox funded the development of the PCS business in
the Los Angeles-San Diego MTA prior to the formation of PioneerCo and received a
full reimbursement of $162.3 million on December 31, 1996. Cox recorded $60.7
million and $6 million of equity in net losses in affiliated companies for the
years ended December 31, 1996 and 1995, respectively, related to the operations
of the PCS system prior to the formation of PioneerCo.
Prior to June 1996, Cox held a 30.06% interest in each of Teleport
Communications Group, Inc. ("TCGI") and Teleport Communications Group Partners
("TCGP"), which both own and operate fiber optic networks serving several U.S.
markets and provide point-to-point digital communications links to
telecommunications-intensive businesses and long-distance carriers. In June
1996, TCGI entered into a reorganization under which, among other things, its
four stockholders, Cox, Comcast, Continental and TCI (collectively, the "Cable
Stockholders") contributed to TCGI all of their partnership interests in
20
- ----
21
<PAGE>
TCGP, any additional interests in local joint ventures and debt and accrued
interest owed by TCGI to the Cable Stockholders (the "Reorganization").
Following the Reorganization, TCGI conducted an initial public offering in which
it sold 27,025,000 shares (the "TCGI IPO"). Upon completion of the
Reorganization and TCGI IPO, Cox owns 39,087,594 shares of TCGI's Class B Common
Stock representing 29.8% of TCGI's Class B Common Stock, 24.6% of total shares
outstanding and a 29.1% voting interest. Each share of Class B Common Stock is
convertible into one share of Class A Common Stock. As a result of the TCGI IPO,
Cox recorded a pre-tax gain of $50.1 million to recognize Cox's proportionate
increase in its share of the underlying net assets of TCGI. Cox recorded $28.5
million, $19.3 million and $9.5 million of equity in net losses in affiliated
companies for the years ended December 31, 1996, 1995 and 1994, respectively,
for its ownership interests in TCGI, TCGP and related joint ventures.
International Broadband Networks
At December 31, 1996, Cox had a 14.7% ownership interest in TeleWest
Communications plc ("TeleWest"), a company that is currently operating and
constructing cable television and telephony systems in the United Kingdom
("U.K."). Cox acquired this interest in October 1995, through the merger of SBC
CableComms (UK) ("CableComms"), which was 50% owned by Cox, with TeleWest (the
"TeleWest Merger"). As a result of the TeleWest Merger, Cox recognized a pre-tax
net gain of $174.8 million.
Cable Television Programming and Other Investments
In August 1996, Cox acquired a 14.2% interest in At Home Corporation ("@Home").
@Home is a national Internet "backbone" service that allows customers to access
the Internet through cable modems at speeds up to hundreds of times faster than
currently available over traditional telephone modems.
In March 1996, Syntellect, Inc. ("Syntellect") merged with the
operations of Telecorp Systems, Inc. ("Telecorp"). As a result of this merger,
Cox received an 8.6% interest in Syntellect in exchange for its 24.5% interest
in Telecorp. Cox recognized a pre-tax gain of $4.6 million related to this
transaction.
In October 1995, Cox acquired a 41% interest in the Outdoor Life Network
("Outdoor Life") and a 39% interest in the Speedvision Network ("Speedvision"),
two new U.S. programming services. Outdoor Life's programming consists
primarily of outdoor recreation, adventure and wildlife themes; Speedvision's
programming consists of a broad variety of material for automobile, boat and
airplane enthusiasts. Cox recorded $18.7 million and $3 million of equity in
net losses of affiliated companies for the years ended December 31, 1996 and
1995, respectively, for its ownership interests in both Outdoor Life and
Speedvision.
Results of Operations
1996 Compared with 1995
The historical results discussed below for 1995 include the results of
operations for the former Times Mirror cable television systems from the Merger
date of February 1, 1995.
Total revenues for the year ended December 31, 1996 increased 14% over
1995 to $1,460.3 million. Basic customers at December 31, 1996 were 3,259,384.
Adjusting for the acquisitions and sales of cable systems during 1996, basic
customers grew 2.3% in 1996.
Complete basic revenues grew 11% to $995.1 million in 1996 due to the
larger customer base and rate increases resulting from the 1996 channel
additions and pass-through of inflation adjustments. Premium service revenues
for 1996 were $189 million, a 2% increase over 1995. Although premium units
increased 10% to 2,000,673 at December 31, 1996, the average rate per unit was
lower in the current year due to a three-for-one premium channel promotion
launched in spring 1996. Pay-per-view revenues grew 8% to $45.6 million in 1996
primarily due to the Tyson/Bruno and Tyson/Holyfield boxing events in 1996.
<PAGE>
Management's Discussion And Analysis (continued)
COX COMMUNICATIONS, INC.
Advertising revenues increased 14% to $81.5 million in 1996 reflecting continued
gains in national account revenue and new customers such as Sprint.
Revenues from satellite operations (Cox Satellite Programming and
PrimeStar) for 1996 were $83.2 million compared to $41.1 million in 1995. This
increase is due to strong growth as PrimeStar customers more than doubled
during the current year to 130,606 at December 31, 1996 from 56,822 at December
31, 1995.
Programming costs were $352.8 million in 1996, a 12% increase over 1995
due to Cox's larger customer base and the offering of additional channels in
1996. Plant operations expenses increased 10% in 1996 as a result of Cox's
increased focus on customer retention programs and repairs of storm damage in
certain systems. Marketing costs were up 14% in 1996 due to the sales programs
associated with the premium channel promotion and an increase in overall Cox
advertising. General and administrative expenses were $291 million in 1996, a
10% increase over 1995 due in part to direct costs associated with the
development of new high-speed data and telephony services and higher property
taxes resulting from the continued upgrade and rebuild of the broadband network
in preparation for the delivery of these new services.
Depreciation increased 33% in 1996 to $264.2 million reflecting
accelerated depreciation expensed in the current year as a result of the upgrade
and rebuild of the broadband network. Operating income for 1996 was $221.7
million, a 2% decrease compared to 1995.
Interest expense increased $13.8 million due primarily to the increase
in total debt outstanding. Equity in net losses of affiliated companies
increased $90.7 million due to increased losses from Sprint PCS, PioneerCo,
Outdoor Life and Speedvision. During 1996, SprintPCS and PioneerCo's losses
increased as a result of developing and constructing their PCS networks in
preparation for their commercial launch of PCS services in December 1996.
Outdoor Life and Speedvision, which were launched as new cable programming
networks during 1995 and 1996, respectively, incurred higher losses in the
current year due to the development of their customer base and program content.
A gain on issuance of stock by affiliated companies of $50.1 million was
recognized as a result of the initial public offering of TCGI. A gain on sale of
affiliated companies of $4.6 million was recognized as a result of the merger of
Telecorp and Syntellect. Net loss for the year was $51.6 million as compared to
net income of $103.8 million in 1995.
Operating cash flow (operating income before depreciation and
amortization) is a commonly used financial analysis tool for measuring and
comparing cable television companies in several areas, such as liquidity,
operating performance and leverage. Operating cash flow for 1996 was $556.9
million, a 13% increase over operating cash flow of $493.3 million in 1995. The
consolidated operating cash flow margin (operating cash flow as a percentage of
revenues) was 38.1% for 1996 as compared to 38.4% for 1995. The core video
business operating cash flow margin, which excludes satellite and competitive
access operations and the direct costs resulting from the development of new
data and residential telephony services, was 40.4% for 1996, an increase from
39.8% for 1995. Operating cash flow should not be considered as an alternative
to net income as an indicator of Cox's performance or as an alternative to cash
flows from operations as a measure of liquidity.
Pro Forma 1995 Compared with Pro Forma 1994
The pro forma results discussed below reflect the Merger and related
transactions as if these transactions had occurred on January 1, 1994.
Revenues for the year ended December 31, 1995 increased 8% over 1994 to
$1,328.1 million. Basic customers at December 31, 1995 were 3,248,759, a 3.9%
increase over basic customers at December 31, 1994. Adjusting for the sale of
the Bullhead City system, basic customer growth was 4.3% for 1995.
22
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<PAGE>
COX COMMUNICATIONS, INC.
Complete basic revenues grew 9% to $929.6 million due to rate increases
and a larger customer base. These average annual rate increases of approximately
$1.80 per month per subscriber reflect programming additions and the pass-
through allowed by the FCC for inflation adjustments and external costs,
primarily programming fee increases.
Premium service revenues for 1995 were $190.6 million, down 6% from
1994, reflecting the January 1995 launch of The Disney Channel ("TDC") on the
cable programming services ("CPS") tier. TDC was previously offered as a premium
service. The introduction of TDC enhances the customer value of the CPS tier and
provides a comparable offering to that provided by direct broadcast satellite
competitors. Excluding the impact of this change, premium service revenues
increased 4% due to unit growth in other premium services. Premium service units
at December 31, 1995 were 1,827,068, an 8.0% decrease from premium service units
at December 31, 1994, due to the transfer of TDC.
Pay-per-view revenues grew 14% to $43.9 million in 1995 primarily due to
an increase in the number of pay-per-view channels offered, the Tyson/McNeeley
boxing event and continued interest in national and regional sporting events.
Advertising revenues increased 19% to $73.6 million reflecting continued gains
in national account revenue and new customers such as Sprint.
Revenues from satellite operations (Cox Satellite Programming and
PrimeStar) for 1995 were $41.1 million, an 86% increase over revenues of $22.1
million in 1994 due to strong customer growth. PrimeStar customers increased
from 17,894 at December 31, 1994 to 56,822 at December 31, 1995 as a result of
increased customer awareness and advertising and a May 1995 retail price
restructuring.
Operating, selling, general and administrative expenses increased 7% to
$812.6 million due to costs directly associated with larger basic customer
levels and higher programming costs. Additionally, in 1995, Cox recorded
severance and related charges of $5.1 million relating to planned 1996 staff
reductions resulting from the restructuring and integration of certain
accounting and MIS functions. Operating income for 1995 was $231.3 million, an
increase of 5% from 1994.
Interest expense decreased $8.8 million due to lower interest rates
during 1995. Equity in net losses of affiliated companies increased $25.5
million due to increased losses of TCGI, Sprint PCS and several start-up
ventures. The gain on sale of affiliated companies primarily represents a $174.8
million pre-tax net gain recognized as a result of the TeleWest Merger. Income
tax expense reflects significant nondeductible amortization resulting from the
Merger. As a result of the factors discussed above, net income increased from a
loss of $12.8 million to $101.2 million.
Operating cash flow for 1995 was $510.4 million, an 8% increase over
operating cash flow of $473.6 million in 1994. Operating cash flow margin was
38.4% for 1995 as compared to 38.3% for 1994. Excluding the satellite and
competitive access operations, the core video operating cash flow margin was
39.8% for 1995 as compared to 39.1% for 1994.
Historical 1995 Compared with Historical 1994
Revenues for 1995 increased 75% as compared with 1994. Operating, selling,
general and administrative and satellite expenses increased 68% and
depreciation and amortization increased 108% as compared to 1994. Operating
income for 1995 increased $86.2 million, or 62%. These increases were primarily
attributable to the Merger.
Interest expense for 1995 increased $86.2 million over 1994 due to debt
assumed in connection with the Merger. Equity in net losses of affiliated
companies increased $35.8 million due to the purchase of an additional 25%
interest in CableComms, increased losses in TCGI, Sprint PCS and losses in
several start-up ventures. The gain on sale of affiliated companies primarily
represents a $174.8 million pre-tax net gain recognized as a result of the
TeleWest Merger. As a result of the factors discussed above, net income
increased $77.2 million.
<PAGE>
Management's Discussion And Analysis (continued)
COX COMMUNICATIONS, INC.
Liquidity and Capital Resources
Uses of Cash
As part of Cox's ongoing strategic plan, Cox has invested, and will continue
to invest, significant amounts of capital to enhance the reliability and
capacity of its broadband network in preparation for the offering of new
services and to make investments in affiliated companies primarily focused on
telephony, programming and communications-related activities.
During 1996, Cox made capital expenditures of $578.9 million. These
expenditures were primarily directed at upgrading and rebuilding its broadband
network in preparation for the delivery of high-speed data and telephony.
Capital expenditures for 1997 are expected to range between $625 million and
$675 million. Capital expenditures for 1998, 1999 and 2000 are expected to
range between $725 million and $775 million, $600 million and $650 million and
$350 million and $400 million, respectively.
In addition to expenditures in existing systems, Cox made strategic
investments in businesses focused on telephony, programming and
communications-related activities. Investments made in 1996 in affiliated
companies included $268 million to Sprint PCS and $70 million to Outdoor Life,
Speedvision, PrimeStar Partners, @Home and other interests. Future funding
requirements for investments in affiliated companies are expected to be
approximately $173 million for Sprint PCS and PhillieCo and $33 million for
programming, PrimeStar and other investments. Additionally, upon the transfer
to PioneerCo of the PCS license for the Los Angeles-San Diego MTA and the
related obligation to the FCC, Cox will be committed to fund $165 million for
the operations of PioneerCo.
The capital requirements for investments in telephony affiliates may
vary significantly from the amounts stated above and will depend on numerous
factors, such as other financing alternatives for Sprint PCS. In addition, many
of these affiliates are growing businesses and specific financing requirements
will change depending on the evolution of these businesses.
Cox's current credit facilities contain covenants which, among other
provisions, restrict the payment of cash dividends or the repurchase of capital
stock if certain requirements are not met as to the ratio of debt to operating
cash flow. Historically, Cox has not paid dividends nor does Cox intend to pay
dividends in the foreseeable future but to reinvest future earnings, consistent
with Cox's business strategy. Although Cox was in compliance with its credit
facility covenants at December 31, 1996, Cox was prohibited from paying
dividends under certain requirements.
Sources of Cash
During 1996, Cox generated $309.1 million from operations. Additionally, net
cash provided by financing activities was $246.2 million and included the
proceeds from the issuance of medium-term notes and commercial paper.
At December 31, 1996, Cox had a $1,200 million revolving credit facility
which matures on December 20, 2000. In addition, Cox had an $800 million
revolving credit facility which matures on October 9, 1997, at which time any
outstanding borrowings convert to a long-term loan due October 9, 2000. These
facilities are committed to back outstanding commercial paper.
In June 1996, Cox entered into a commercial paper program under which
Cox may borrow $750 million. At December 31, 1996, there was $718.7 million
outstanding, net of unamortized discount of $3.3 million, under the commercial
paper program.
In April 1996, Cox filed a Form S-3 Registration Statement (the "Shelf
Registration") with the Securities and Exchange Commission under which Cox may
from time to time offer and issue debentures, notes, bonds or other evidence of
indebtedness for a maximum aggregate amount of $750 million. During 1996, Cox
sold $125 million of medium-term notes under the Shelf Registration. The notes
are due in varying amounts
24
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<PAGE>
COX COMMUNICATIONS, INC.
through November 2006 with interest at fixed rates ranging from 6.94% to 7.19%.
During 1996, Cox received proceeds from affiliated companies of $162.3
million related to a reimbursement from Cox Communications PCS of 1995 and 1996
funding. In addition, $201.8 million was received for the sales of the
Texarkana and the Ashland and Defiance cable television systems and the trade
of the Williamsport cable television system for an East Providence cable
television system.
CEI continues to perform day-to-day cash management services for Cox
with settlements of balances between Cox and CEI occurring periodically at
market interest rates.
At December 31, 1996, Cox had approximately $2,881 million of
outstanding indebtedness, including amounts due to CEI and had approximately
$1,453 million available under its revolving credit facilities and Shelf
Registration. Cox's Notes and Debentures issued during 1996 are rated Baa2 by
Moody's and A- by Standard & Poor's.
Cox expects that the cost of its cable upgrades and investment activity
will exceed Cox's funds from operations and, therefore, additional capital will
be necessary. Cox believes it will be able to meet its capital needs with
unused amounts available under existing revolving agreements and the Shelf
Registration. In addition, Cox is pursuing alternatives to monetize certain
unconsolidated investments.
Rate Regulation
Many franchising authorities have become certified by the FCC to regulate
rates charged by Cox for basic cable service and associated basic cable service
equipment. Some local franchising authority decisions have been rendered that
were adverse to Cox. In addition, a number of such franchising authorities and
customers of Cox filed complaints with the FCC regarding the rates charged for
cable programming services. In December 1995, the FCC approved a Resolution of
all outstanding rate complaints covering the Cox and former Times Mirror cable
television systems. The Resolution, among other things, provided for the
payment of refunds of $7.1 million plus interest to one million customers
in January 1996, and the removal of additional outlet charges for regulated
services from all of the former Times Mirror cable television systems. The
Resolution also stated that Cox's CPS tier rates as of June 30, 1995 were not
unreasonable. Refunds under the Resolution were fully provided for in Cox's
financial statements at December 31, 1995. In January 1996, the City of Irvine
and six other cities located in California filed an appeal to set aside the
Resolution in the United States Court of Appeals for the Ninth Circuit. The FCC
is a party to the appeal and Cox has been granted leave to intervene. Cox
cannot predict the outcome of this appeal.
The Telecommunications Competition and Deregulation Act of 1996 ("the
1996 Act") became effective in February 1996. The 1996 Act is intended to
promote substantial competition in the delivery of video and other services by
local telephone companies (also known as local exchange carriers or "LECs") and
other service providers, and permits cable television operators to provide
telephone services. Among other provisions, the 1996 Act deregulates the CPS
tier of large cable operators on March 31, 1999 and upon enactment the CPS rates
of small cable operators serving 50,000 or fewer subscribers, revises the
procedures for filing a CPS complaint, and adds a new effective competition
test.
<PAGE>
============================================================================
Consolidated Balance Sheets
============================================================================
COX COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
(Thousands of Dollars)
<S> <C> <C>
Assets
Cash $ 42,349 $ 39,166
Accounts and notes receivable, less allowance for doubtful
accounts of $7,778 and $6,804 122,574 117,885
Net plant and equipment 1,531,811 1,213,857
Investments 1,219,082 1,201,253
Intangible assets 2,728,955 2,775,903
Other assets 139,819 207,193
.............................................................................................................
Total assets $5,784,590 $5,555,257
=============================================================================================================
Liabilities and shareholders' equity
Accounts payable and accrued expenses $ 220,859 $ 202,204
Deferred income 29,440 40,900
Deferred income taxes 294,453 288,039
Other liabilities 97,526 116,771
Debt 2,823,853 2,392,725
Amounts due to Cox Enterprises, Inc. ("CEI") 57,147 182,605
.............................................................................................................
Total liabilities 3,523,278 3,223,244
.............................................................................................................
Commitments and contingencies (Note 16)
Shareholders' equity
Preferred Stock, $1 par value; 5,000,000 shares authorized; none issued - -
Class A Common Stock, $1 par value; 286,000,000 shares authorized;
shares issued and outstanding: 256,463,651 and 256,365,194 256,464 256,365
Class C Common Stock, $1 par value; 14,000,000 shares authorized;
shares issued and outstanding: 13,798,896 13,799 13,799
Additional paid-in capital 1,742,121 1,739,422
Retained earnings 216,097 267,648
Foreign currency translation adjustment 23,424 (3,413)
Net unrealized gain on securities 9,407 58,192
.............................................................................................................
Total shareholders' equity 2,261,312 2,332,013
.............................................................................................................
Total liabilities and shareholders' equity $5,784,590 $5,555,257
=============================================================================================================
</TABLE>
See notes to consolidated financial statements.
26
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<PAGE>
================================================================================
Consolidated Statements Of Operations
================================================================================
COX COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues
Complete basic $ 995,085 $ 898,329 $ 487,556
New product tier 14,222 10,085 4,077
Premium service 189,039 185,080 133,764
Pay-per-view 45,610 42,343 19,606
Advertising 81,520 71,590 37,675
Satellite 83,164 41,084 22,100
Other 51,645 37,735 31,530
..........................................................................................................................
Total revenues 1,460,285 1,286,246 736,308
Costs and expenses
Programming costs 352,834 314,440 167,790
Plant operations 140,777 128,201 77,803
Marketing 43,054 37,731 33,812
General and administrative 291,043 265,753 165,446
Satellite operating and administrative 75,680 41,682 22,931
Restructuring charge - 5,139 -
Depreciation 264,188 198,788 106,864
Amortization 70,973 68,524 21,910
..........................................................................................................................
Operating income 221,736 225,988 139,752
Interest expense (146,077) (132,308) (46,128)
Equity in net losses of affiliated companies (170,435) (79,734) (43,905)
Gain on issuance of stock by affiliated companies 50,100 - -
Gain on sale of affiliated companies 4,640 188,806 -
Other, net 11,531 951 2,627
..........................................................................................................................
Income (loss) before income taxes (28,505) 203,703 52,346
Income taxes 23,046 99,894 25,780
..........................................................................................................................
Net income (loss) $ (51,551) $ 103,809 $ 26,566
==========================================================================================================================
Per share data (Note 4)
Net loss per share $ (0.19) - -
Weighted-average shares outstanding 270,240,757 - -
==========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
===============================================================================
Consolidated Statements Of Shareholders' Equity
===============================================================================
COX COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Net
Foreign unrealized
Common Stock Additional currency gain
Preferred ----------------- paid-in Retained translation (loss) on
(Thousands of Dollars) Stock Class A Class C capital earnings adjustment securities Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 - - - $ 581,037 $ 137,273 $ (1,720) - $ 716,590
Net income 26,566 26,566
Debt assigned by CEI (204,727) (204,727)
Capital contributions by CEI 294,185 294,185
Foreign currency translation
adjustment 499 499
Change in net unrealized gain
(loss) on securities $ 1,712 1,712
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 - - - 670,495 163,839 (1,221) 1,712 834,825
Net income 103,809 103,809
Issuance of stock related to
Merger $ 236,201 $ 13,799 682,001 932,001
Issuance of stock related to
public offering and private
placement 19,799 337,231 357,030
Issuance of stock related to
stock compensation plans 365 5,851 6,216
Capital contribution by CEI 43,844 43,844
Foreign currency translation
adjustment (2,192) (2,192)
Change in net unrealized gain
(loss) on securities 56,480 56,480
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - 256,365 13,799 1,739,422 267,648 (3,413) 58,192 2,332,013
Net loss (51,551) (51,551)
Issuance of stock related to
stock compensation plans 99 1,591 1,690
Capital contribution by CEI 1,108 1,108
Foreign currency translation
adjustment 26,837 26,837
Change in net unrealized gain
(loss) on securities (48,785) (48,785)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - $ 256,464 $13,799 $1,742,121 $ 216,097 $ 23,424 $ 9,407 $2,261,312
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
28
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<PAGE>
-------------------------------------
Consolidated Statements Of Cash Flows
-------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (51,551) $ 103,809 $ 26,566
Adjustments to reconcile net income (loss) to net cash provided
by operating activities, net of effects of acquisitions:
Depreciation 264,188 198,788 106,864
Amortization 70,973 68,524 21,910
Equity in net losses of affiliated companies 170,435 79,734 43,905
Deferred income taxes (52,519) 22,730 (3,471)
Gain on issuance of stock by affiliated companies (50,100) - -
Gain on sale of affiliated companies (4,640) (188,806) -
Net loss on write down of investments - 20,662 -
Increase in accounts receivable (4,222) (25,372) (7,655)
Increase in accounts payable and accrued expenses 31,161 15,666 10,271
Increase (decrease) in taxes payable (32,762) 25,389 1,596
Other, net (31,826) 3,786 5,054
........................................................................................................
Net cash provided by operating activities 309,137 324,910 205,040
........................................................................................................
Cash flows from investing activities
Capital expenditures (578,926) (369,557) (188,178)
Acquisitions, net of cash acquired - (102,909) (5,000)
Investments in affiliated companies (338,402) (527,922) (181,575)
Proceeds from affiliated companies 162,287 113,222 -
Proceeds from sales of business 201,791 20,000 -
Other, net 1,085 1,632 2,538
........................................................................................................
Net cash used in investing activities (552,165) (865,534) (372,215)
........................................................................................................
Cash flows from financing activities
Revolving credit borrowings (repayments), net (418,364) (1,191,902) 750,000
Net proceeds from sale of commercial paper 718,704 - -
Proceeds from issuance of debt 124,279 1,203,662 -
Repayment of debt (8,104) (19,990) -
Proceeds from exercise of options 1,275 -
Increase (decrease) in amounts due to CEI (126,764) 175,770 (606,709)
Proceeds from issuance of common stock - 357,030 -
Increase (decrease) in book overdrafts (44,815) 51,874 12,986
........................................................................................................
Net cash provided by financing activities 246,211 576,444 156,277
........................................................................................................
Net increase (decrease) in cash 3,183 35,820 (10,898)
Cash at beginning of period 39,166 3,346 14,244
........................................................................................................
Cash at end of period $ 42,349 $ 39,166 $ 3,346
- --------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Notes To Consolidated Financial Statements
Note 1
Organization and Basis of
Presentation
Cox Communications, Inc. ("Cox"), an indirect 75.3% owned subsidiary of CEI,
is among the nation's five largest multiple system operators, serving some 3.3
million customers. Cox is a fully integrated, diversified broadband
communications company with interests in domestic and United Kingdom ("U.K.")
cable distribution systems, programming networks and telecommunications
technology. In May 1994, CEI and certain of its subsidiaries transferred
ownership of its cable television operations and related investments to Cox.
CEI's historical basis in the assets and liabilities of the operations and
investments transferred has been carried over to Cox. The consolidated
financial statements of Cox represent the combined operations of the cable
television systems and related investments owned by CEI or its other
subsidiaries. The historical financial statements do not necessarily reflect
the results of operations or financial position that would have existed had Cox
been an independent company. All significant intercompany accounts have been
eliminated in the consolidated financial statements of Cox.
Note 2
Summary of Significant
Accounting Policies
Revenue Recognition
Cox bills its customers in advance; however, revenue is recognized as cable
television services are provided. Receivables are generally collected within 30
days. Credit risk is managed by disconnecting services to customers who are
delinquent generally greater than 75 days. Other revenues are recognized as
services are provided. Revenues obtained from the connection of customers to
the cable television systems are less than related direct selling costs;
therefore, such revenues are recognized as received.
Plant and Equipment
Depreciation is computed using principally the straight-line method at rates
based upon estimated useful lives of five to 20 years for buildings and
building improvements, five to 12 years for cable television systems and three
to 10 years for other plant and equipment.
The costs of initial cable television connections are capitalized as
cable plant at standard rates for Cox's labor and at actual costs for materials
and outside labor. Construction costs of new buildings, cable television systems
and equipment include capitalized interest. Expenditures for maintenance and
repairs are charged to operating expense as incurred. At the time of
retirements, sales or other dispositions of property, the original cost and
related accumulated depreciation are written off.
Investments
Investments in affiliates are accounted for under the equity method or cost
basis depending upon the level of ownership in the investment and/or Cox's
ability to exercise significant influence over the operating and financial
policies of the investee. Equity method investments are recorded at cost and
adjusted periodically to recognize Cox's proportionate share of the investees'
undistributed income or losses.
Cost method investments in publicly traded companies are classified as
available-for-sale and are stated at fair market value with the unrealized
gains and losses recorded, net of taxes, as a separate component of
shareholders' equity. Cost method investments in privately held companies are
stated at cost adjusted for any known diminution in value determined to be
other than temporary in nature.
Intangible Assets
Intangible assets consist primarily of goodwill, franchise costs and
personal communications services ("PCS") licenses including capitalized
interest. Goodwill and franchise costs recorded in business combinations
generally are amortized on a straight-line basis over 40 years. PCS licenses
including capitalized interest and other intangible assets are amortized on a
straight-line basis over the estimated life of the asset. Cox assesses on an
on-going basis the recoverability of intangible assets based on estimates of
future undiscounted cash flows for the applicable business acquired compared to
net book value. If the future undiscounted cash flow estimate is less than net
book value, net book value is then reduced to the undiscounted cash flow
estimate. Cox also evaluates the amortization periods of intangible assets to
determine whether events or circumstances warrant revised estimates of useful
lives.
30
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<PAGE>
Impairment of Long-Lived Assets
Effective January 1996, Cox adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." This Statement requires that
long-lived assets and certain intangibles be reviewed for impairment when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, with any impairment losses being reported in the
period in which the recognition criteria are first applied based on the fair
value of the asset. Long-lived assets and certain intangibles to be disposed of
are required to be reported at the lower of carrying amount or fair value less
cost to sell. There was no impact on the financial statements upon adoption of
SFAS No. 121.
Income Taxes
The accounts of Cox historically have been included in the consolidated
federal income tax return and certain state income tax returns of CEI. Current
federal and state income tax expenses and benefits have been allocated on a
separate return basis to Cox based on the current year tax effects of the
inclusion of its income, expenses and credits in the consolidated income tax
returns of CEI or based on separate state income tax returns.
Deferred income tax assets and liabilities arise from differences in
recording certain income and expenses for financial reporting and income tax
purposes and are principally related to depreciation and amortization and
equity in net losses of affiliated companies.
Pension, Postretirement and Postemployment Benefits
Cox generally provides defined pension benefits to all employees based on
years of service and compensation during those years. Cox provides certain
health care and life insurance benefits to substantially all retirees and
employees through certain CEI plans. Expense related to the CEI plans is
allocated to Cox through the intercompany account. The amount of the
allocations is generally based on actuarial determinations of the effects of
Cox employees' participation in the plans.
Stock Compensation Plans
As described in Note 11, Cox accounts for stock compensation plans using the
intrinsic value method prescribed in APB Opinion 25, "Accounting for Stock
Issued to Employees," and discloses the pro forma effect on net income and
earnings per share of using the fair value method as required by SFAS No. 123,
"Accounting for Stock-Based Compensation."
Net Income (Loss) Per Common Share
Net income (loss) per common share is based on the weighted average number
of common shares and, as appropriate, dilutive common stock equivalents
outstanding for the period.
Cox Class A Common Stock became publicly traded on the New York Stock
Exchange effective February 1, 1995. Earnings per common share calculations for
the years ended December 31, 1995 and 1994 have not been disclosed because the
dissimilarity of the previous capital structure of Cox precludes a meaningful
comparison. Pro forma earnings per common share for 1995 and 1994 are presented
for comparative purposes in Note 4 assuming the shares issued in the merger
with the former Times Mirror cable television systems had been outstanding for
all periods.
Restructuring Charge
During December 1995, Cox recorded a $5,139,000 pre-tax restructuring
charge. This charge principally represents severance, benefits and other
related costs associated with the elimination of 202 accounting and MIS staff
positions during 1996. At December 31, 1996 and 1995, the balance of the
restructuring liability was $1,698,000 and $3,737,000, respectively. The
majority of the remaining liability as of December 31, 1996 is expected to be
paid or settled during 1997.
Foreign Currency Translation
The financial statements of Cox's non-U.S. investments are translated into
U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation."
Net assets of non-U.S. investments whose functional currencies are other than
the U.S. dollar are translated at the current rate of exchange. Income and
expense items are translated at the average exchange rate for the year. The
resulting translation adjustments are recorded, net of taxes, directly into a
separate component of shareholders' equity.
<PAGE>
================================================================================
Notes To Consolidated Financial Statements (continued)
================================================================================
COX COMMUNICATIONS, INC.
Interest Rate Hedges
Gains and losses related to qualifying hedges of anticipated debt
transactions are deferred and are recognized as adjustments of carrying amounts
when the hedged transactions occur. In the Consolidated Statements of Cash
Flows, realized gains and losses are classified along with the related debt
transaction as financing activities. Such gains or losses are amortized using
the interest method over the life of the related debt as adjustments to
interest expense.
Capitalized Interest
Interest is capitalized as part of the historical cost of acquiring
qualifying assets, including self-constructed assets and advances to equity
method investees used to acquire qualifying assets while the investee has
activities in progress necessary to commence its planned principal operations.
Interest capitalized for the years ended December 31, 1996, 1995 and 1994 was
$43,183,000, $14,188,000 and $70,000, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified for comparative purposes.
NOTE 3
CASH MANAGEMENT SYSTEM
Cox participates in CEI's cash management system, whereby the bank sends
daily notification of checks presented for payment. CEI transfers funds from
other sources to cover the checks presented for payment. Book overdrafts of
$23,663,000 and $68,442,000 existed at December 31, 1996 and 1995,
respectively, as a result of checks outstanding. These book overdrafts were
reclassified as accounts payable and are considered financing activities in the
Consolidated Statements of Cash Flows.
NOTE 4
ACQUISITIONS, DISPOSITIONS
AND EXCHANGES OF BUSINESSES
Effective February 1, 1995, Cox, CEI, The Times Mirror Company ("Times
Mirror") and New TMC Inc. ("New Times Mirror") consummated a merger (the
"Merger"), pursuant to which Times Mirror (which, at the time of the Merger,
was engaged only in the cable television business) merged with and into Cox. In
connection with the Merger, Cox Class A Common Stock became publicly traded on
the New York Stock Exchange. Following the Merger, New Times Mirror changed its
name to "The Times Mirror Company." As a result of the Merger, the former Times
Mirror stockholders received a total of approximately 54,904,252 shares of Cox
Class A Common Stock. Subsidiaries of CEI received 181,296,833 shares of Cox
Class A Common Stock and 13,798,896 shares of Cox Class C Common Stock.
The Merger was accounted for by the purchase method of accounting,
whereby the purchase price was allocated to the assets and liabilities assumed
based on their estimated fair values at the date of acquisition as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C>
Purchase Price:
Debt assumed $1,364,000
Stock issued 932,000
Net working capital deficit and other
net liabilities assumed 151,110
Merger costs 43,696
..........................................................................
2,490,806
Fair Market Value of Assets and Liabilities Acquired:
Plant and equipment 379,014
Investments 28,300
Deferred taxes related to plant and equipment write-down 38,389
Other assets, net of deferred taxes 2,643
..........................................................................
448,346
..........................................................................
Purchase Price over Fair Value of Net Assets Acquired $2,042,460
- --------------------------------------------------------------------------
</TABLE>
<PAGE>
COX COMMUNICATIONS, INC.
The excess of the purchase price over the fair value of net assets
acquired has been recorded as goodwill and is being amortized on a straight-line
basis over 40 years. Results of operations have been included in the
consolidated financial statements from the date of acquisition.
The following unaudited table sets forth selected pro forma consolidated
results of operations as if the Merger had occurred at the beginning of the
periods presented and does not purport to be indicative of the operating
results that would have occurred if the Merger had been consummated as of those
dates nor is it necessarily indicative of the future operating results.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Year Ended December 31, 1995 1994
<S> <C> <C>
(Thousands of Dollars, except per share data)
Revenues $1,328,122 $1,235,159
Depreciation and amortization 279,114 253,809
Operating income 231,289 219,756
Net income (loss) 101,239 (12,752)
Pro forma per share data:
Net income (loss) per share $ 0.39 $ (0.05)
Pro forma weighted-average
shares outstanding 260,788,241 250,364,240
- --------------------------------------------------------------------------
</TABLE>
The above pro forma information does not include, due to immateriality,
the effects of the following transactions:
In September 1995, Cox sold its cable television system serving
approximately 13,000 customers in Bullhead City, Arizona for $20,000,000. No
gain or loss resulted from this transaction.
In January 1996, Cox acquired a cable television system serving
approximately 51,000 customers in Newport News, Virginia, for approximately
$122,250,000. Cox operates this system as part of its cluster of systems in the
Hampton Roads, Virginia area.
In January 1996, Cox sold its cable television system in Texarkana,
Texas. The system, which was acquired as part of the Merger, served
approximately 23,400 customers. No gain or loss resulted from this transaction.
In April 1996, Cox exchanged its Williamsport, Pennsylvania cable
television system for $13,000,000 and a cable television system in East
Providence, Rhode Island. The Williamsport system, which was acquired as part of
the Merger, served approximately 24,500 customers in Williamsport. The East
Providence system serves approximately 15,500 customers. No gain or loss
resulted from this transaction.
In April 1996, Cox sold certain cable television systems in the Ashland,
Kentucky and Defiance, Ohio area for $136,000,000. These systems, which were
acquired as a result of the Merger, together served approximately 78,600
customers. No gain or loss resulted from this transaction.
In October 1996, Cox and Time Warner Entertainment/Advance-Newhouse
("Time Warner") entered into an agreement whereby Cox agreed to exchange its
Myrtle Beach, South Carolina cable television system serving approximately
42,230 customers for Time Warner's Hampton and Williamsburg, Virginia cable
television systems serving approximately 45,300 customers. The transaction also
includes a Texas cable television system serving approximately 7,000 customers
to be purchased by Cox and then immediately traded to Time Warner. Cox
anticipates this transaction will be consummated during the first quarter of
1997. In addition, Cox anticipates that it will recognize a book gain on this
transaction.
In January 1997, Cox and Tele-Communications, Inc. ("TCI") exchanged
certain cable television systems owned by Cox serving approximately 319,000
customers for certain cable television systems owned by TCI serving
approximately 296,000 customers. As a result of the transaction, Cox received
TCI's systems in Bellevue/LaVista, Nebraska and Council Bluffs, Iowa;
Chesapeake, Virginia; Scottsdale, Arizona; North Attleboro/Taunton,
Massachusetts; Lincoln, Rhode Island; and St. Bernard, Louisiana. In exchange,
TCI received Cox's systems in the greater Pittsburgh area; Spokane, Washington;
Springfield, Illinois; Cedar Rapids, Iowa and the Quad Cities area of Illinois
and Iowa; and Saginaw, Michigan. No gain or loss resulted from this transaction.
In January 1997, Cox and Continental Cablevision ("Continental"), which
manages the domestic cable properties of U S WEST Media Group, exchanged
certain cable television systems, each serving approximately 48,000 customers.
Cox received Continental's systems in James City and York County, Virginia and
Pawtucket, Rhode Island and Continental received Cox's systems in western
Massachusetts and Weymouth, Massachusetts. No gain or loss resulted from this
transaction.
<PAGE>
Notes To Consolidated Financial Statements (continued)
COX COMMUNICATIONS, INC.
NOTE 5
PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1996 1995
(Thousands of Dollars)
<S> <C> <C>
Land $ 26,649 $ 21,072
Buildings and building improvements 90,522 72,407
Transmission and distribution plant 1,923,729 1,758,056
Miscellaneous equipment 187,496 150,350
Construction in progress 114,627 79,615
................................................................................
Plant and equipment, at cost 2,343,023 2,081,500
Less accumulated depreciation (811,212) (867,643)
................................................................................
Net plant and equipment $1,531,811 $1,213,857
- --------------------------------------------------------------------------------
</TABLE>
NOTE 6
INVESTMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1996 1995
(Thousands of Dollars)
<S> <C> <C>
Equity method investments $ 713,500 $ 647,217
Cost method investments:
Publicly traded companies 474,396 517,250
Privately held companies 31,186 36,786
................................................................................
Total investments $1,219,082 $1,201,253
- --------------------------------------------------------------------------------
</TABLE>
Summarized combined unaudited financial information for all equity method
investments and Cox's proportionate share (determined based on Cox's ownership
interest in each investment) for 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, Cox's
(Thousands of Dollars) Proportionate
Combined Share
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues $1,569,634 $1,171,741 $359,926 $318,534
Operating loss (283,539) (92,289) (82,637) (31,960)
Net loss (566,626) (217,285) (159,415) (66,884)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, Combined
(Thousands of Dollars) 1996 1995
<S> <C> <C>
Current assets $1,925,686 $ 431,140
Noncurrent assets 6,144,486 3,768,691
Current liabilities 925,633 355,771
Noncurrent liabilities 3,497,226 1,175,551
Equity 3,647,313 2,668,509
- --------------------------------------------------------------------------------
</TABLE>
The summarized unaudited financial information presented below for these
significant equity method investments served as the basis for which Cox
recorded its share of equity in net losses:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars) Sprint Outdoor GEMS
Year Ended December 31, 1996 PCS PioneerCo TCGI Life Speedvision Television
<S> <C> <C> <C> <C> <C> <C>
Revenues - $ 692 $ 267,669 $ 2,479 $ 1,966 $ 8,666
Operating loss $ (274,475) (45,588) (53,362) (22,196) (29,996) (8,818)
Net loss (388,575) (60,725) (114,849) (22,196) (29,996) (12,304)
..................................................................................................................................
<CAPTION>
December 31, 1996
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 324,831 $ 5,480 $ 796,619 $ 14,357 $ 5,832 $ 7,051
Noncurrent assets 3,770,826 197,797 1,260,866 1,644 3,215 14,856
Current liabilities 196,408 128,486 253,112 3,817 3,994 3,410
Noncurrent liabilities 1,394,931 141,502 1,007,503 - - 15,413
Equity 2,504,318 (66,711) 796,870 12,184 5,053 3,084
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Thousands of Dollars)
Year Ended December 31, 1995
<S> <C> <C> <C> <C> <C> <C>
Revenues - - $ 166,169 - - $ 6,409
Operating loss $ (64,520) $ (5,581) (15,261) $ (3,473) $ (2,430) (9,771)
Net loss (110,428) (5,953) (53,804) (3,470) (2,428) (13,558)
..................................................................................................................................
<CAPTION>
December 31, 1995
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 1,651 $ 4,017 $ 50,206 $ 2,020 $ 2,667 $ 5,466
Noncurrent assets 2,242,692 8,965 564,587 5,912 3,347 17,287
Current liabilities 49,417 6,587 97,289 1,655 1,199 3,131
Noncurrent liabilities 11,856 12,348 392,156 - - 5,352
Equity 2,183,070 (5,953) 125,348 6,277 4,815 14,270
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
- ----
35
<PAGE>
COX COMMUNICATIONS, INC.
Cox's share of the net losses as stated above is not equal to the net
losses from equity investments reported in the Consolidated Statements of
Operations due to amortization and other expenses. At December 31, 1996, the
aggregate unamortized excess of Cox's investments over its equity in the
underlying net assets of the affiliates was approximately $42,472,000 and is
being amortized over periods ranging from five to 40 years. Amortization
included in equity in net losses of affiliates for the years ended December 31,
1996, 1995 and 1994 was $4,272,000, $5,622,000 and $5,163,000, respectively.
The investment balances above include investments in and advances to
affiliated companies. The advances are generally interest-bearing, long-term
notes receivable totaling $72,175,000 and $136,534,000 at December 31, 1996 and
1995, respectively. Interest income recognized on notes receivable was
$11,951,000, $9,496,000 and $5,237,000 in 1996, 1995 and 1994, respectively.
Cox has classified its cost method investments in publicly traded
companies as available-for-sale which have an aggregate cost of $425,332,000. At
December 31, 1996 and 1995, the unrealized gain for these investments was
$15,787,000 ($9,407,000 net-of-tax) and $96,986,000 ($58,192,000 net-of-tax),
respectively. The carrying value of publicly traded companies at December 31,
1996 includes a $33,277,000 foreign currency translation adjustment related to
Cox's interest in TeleWest Communications plc ("TeleWest"), a publicly traded
company in the U.K. Fair market values of publicly traded investments are based
on quoted market prices. At February 19, 1997, the fair market value of Cox's
publicly traded investments was $415,429,000.
At December 31, 1996 and 1995, cost method investments in privately held
companies were carried at an aggregate cost of $31,186,000 and $36,786,000,
respectively. It was not practicable to estimate the fair values of privately
held investments due to lack of quoted market prices and the excessive cost
involved in determining such fair values. During 1995, certain investments were
written down by $20,662,000 to their net realizable value.
Telephony
Cox was awarded a broadband PCS license for the Los Angeles-San Diego Major
Trading Area ("MTA") in 1995 under the Federal Communications Commission's
("FCC") pioneer preference program. The amount payable by Cox for the license is
$251,918,000 and was included in outstanding debt at December 31, 1996 and 1995.
In December 1996, pursuant to previous agreements, Cox, CEI, TCI,
Comcast Corporation ("Comcast") and Sprint Corporation ("Sprint") formed Cox
Communications PCS, L.P. ("PioneerCo") to operate the PCS system in the Los
Angeles-San Diego MTA. PioneerCo is owned 49% by Sprint Spectrum Holding Company
L.P. ("Sprint PCS") as limited partner and 51% by Cox Pioneer Partnership
("CPP") as general partner. CPP is a jointly controlled partnership owned
approximately 78% by Cox and approximately 22% by CEI. Cox, as managing general
partner of CPP, has day-to-day management authority over PioneerCo. Upon FCC
approval, which is expected in the first quarter 1997, the PCS license for the
Los Angeles-San Diego MTA and the related obligation to the FCC will be
transferred from Cox to PioneerCo. Upon the earlier of December 31, 1997 or
completion of the FCC's buildout requirement, CPP has the right to put its
interest to Sprint PCS at fair market value over a five-year period. In
addition, CPP has the right to put its entire interest from the fifth through
the eighth anniversaries of the earlier of December 31, 1997 or completion of
the buildout, and Sprint PCS has a call on CPP's interest from the fourth to the
eighth anniversaries of the earlier of December 31, 1997 or completion of the
buildout requirement. Cox funded the development of the PCS business in the Los
Angeles-San Diego MTA prior to the formation of PioneerCo and received a full
reimbursement of $162,300,000 on December 31, 1996. Cox recorded $60,700,000 and
$6,000,000 of equity in net losses in affiliated December 31, 1996 and 1995,
respectively, related to the operations of the PCS system prior to the formation
of PioneerCo.
Prior to June 1996, Cox held a 30.06% interest in each of Teleport
Communications Group, Inc. ("TCGI") and Teleport Communications Group Partners
("TCGP"), which both own and operate fiber optic networks serving several U.S.
markets and provide point-to-point digital communications links to
telecommunications-intensive businesses and long-distance carriers. In June
1996, TCGI entered into a reorganization under which, among other things, its
four stockholders, Cox, Comcast, Continental and TCI (collectively, the "Cable
Stockholders") contributed to TCGI all of
<PAGE>
================================================================================
Notes To Consolidated Financial Statements (continued)
================================================================================
COX COMMUNICATIONS, INC.
their partnership interests in TCGP, any additional interests in local joint
ventures and debt and accrued interest owed by TCGI to the Cable Stockholders
(the "Reorganization"). Following the Reorganization, TCGI conducted an initial
public offering in which it sold 27,025,000 shares (the "TCGI IPO"). Upon
completion of the Reorganization and the TCGI IPO, Cox owns 39,087,594 shares
of TCGI's Class B Common Stock representing 29.8% of TCGI's Class B Common
Stock, 24.6% of total shares outstanding and a 29.1% voting interest. Each
share of Class B Common Stock is convertible into one share of Class A Common
Stock. As a result of the TCGI IPO, Cox recorded a pre-tax gain of
$50,100,000 to recognize Cox's proportionate increase in its share of the
underlying net assets of TCGI. Cox recorded $28,500,000, $19,300,000 and
$9,500,000 of equity in net losses of affiliated companies for the years ended
December 31, 1996, 1995 and 1994, respectively, for its ownership interests in
TCGI, TCGP and related joint ventures.
In October 1994, subsidiaries of Cox, TCI, Comcast and Sprint formed a
partnership known as "WirelessCo" to engage in the business of providing
wireless communications services, primarily PCS. WirelessCo, of which Cox owns
a 15% interest, was the successful bidder for 29 broadband PCS licenses in the
auction conducted by the FCC from December 1994 through March 1995. The total
purchase price for the 29 licenses was approximately $2.1 billion. In March
1995, Cox, TCI, Comcast and Sprint formed Sprint PCS to which the partners
contributed all of their respective interests in WirelessCo. Cox recorded
$56,500,000, $7,900,000 and $450,000 of equity in net losses in affiliated
companies for the years ended December 31, 1996, 1995 and 1994, respectively,
for its ownership interest in Sprint PCS and its predecessor, WirelessCo.
During 1994, subsidiaries of Cox, TCI and Sprint also formed a separate
partnership ("Phillieco"), in which Cox owns a 17.6% interest. Phillieco was
the successful bidder for a broadband PCS license for the Philadelphia MTA, for
which the purchase price was approximately $85,000,000.
International Broadband Networks
At December 31, 1996, Cox had an ownership interest of 14.7% in TeleWest, a
company that is currently operating and constructing cable television and
telephony systems in the U.K. Cox acquired this interest in October 1995
through the merger of SBC CableComms (UK) ("CableComms"), which was 50% owned by
Cox, with TeleWest (the "TeleWest Merger"). As a result of the TeleWest Merger,
Cox recognized a pre-tax net gain of $174,833,000. At December 31, 1996 and
1995, the carrying value of Cox's investment in TeleWest was $440,398,000 and
$500,335,000, respectively.
In May 1995, Cox sold its 50% interest in STOFA A/S, a private operator
of cable television systems in Denmark for $13,300,000 resulting in a pre-tax
gain of approximately $10,200,000.
Cable Television Programming and Other Investments
In August 1996, Cox acquired a 14.2% interest in At Home Corporation
("@Home"). @Home is a national Internet "backbone" service that allows
customers to access the Internet through cable modems at speeds up to hundreds
of times faster than currently available over traditional telephone modems.
In March 1996, Syntellect, Inc. ("Syntellect") merged with the
operations of Telecorp Systems, Inc. ("Telecorp"). As a result of this merger,
Cox received an 8.6% interest in Syntellect in exchange for its 24.5% interest
in Telecorp. Cox recognized a pre-tax gain of $4,640,000 related to this
transaction.
In October 1995, Cox acquired a 41% interest in the Outdoor Life Network
("Outdoor Life") and a 39% interest in the Speedvision Network ("Speedvision"),
two new U.S. programming services. Outdoor Life's programming consists
primarily of outdoor recreation, adventure and wildlife themes; Speedvision's
programming consists of a broad variety of material for automobile, boat and
airplane enthusiasts. Cox recorded $18,700,000 and $3,000,000 of equity in net
losses of affiliated companies for the years ended December 31, 1996 and 1995,
respectively, for its ownership interests in both Outdoor Life and Speedvision.
Cox also owns: a 50% interest in TWC Cable Partners, which owns cable
television systems in Staten Island, New York, and Fort Walton Beach, Florida;
a 38% interest in UK Gold and a 49.6% interest in UK Living, satellite
programming networks serving the U.K.; a 24.6% interest in Discovery
Communications, Inc., a documentary programming network that operates The
Discovery Channel and The Learning Channel; a 50% interest in GEMS Television,
a Spanish-language network in North and South America; and various other
programming networks and cable television businesses.
36
- ----
37
<PAGE>
COX COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
NOTE 7
INTANGIBLE ASSETS
- ----------------------------------------------------------------
<S> <C> <C>
December 31, 1996 1995
(Thousands of Dollars)
Goodwill $2,659,258 $2,672,227
Franchise costs 79,195 77,547
PCS licenses including
capitalized interest 277,176 257,023
Other 17,671 29,888
................................................................
Total 3,033,300 3,036,685
Less accumulated amortization (304,345) (260,782)
................................................................
Net intangible assets $2,728,955 $2,775,903
- ----------------------------------------------------------------
</TABLE>
NOTE 8
INCOME TAXES
<TABLE>
<CAPTION>
Current and deferred income tax expenses (benefits) are as follows:
- ----------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1996 1995 1994
(Thousands of Dollars)
Current:
Federal $ 41,694 $59,029 $24,035
State 33,871 18,135 5,216
................................................................
Total current 75,565 77,164 29,251
................................................................
Deferred:
Federal (38,340) 22,806 (2,754)
State (14,179) (76) (717)
................................................................
Total deferred (52,519) 22,730 (3,471)
................................................................
Net income tax
expense $ 23,046 $99,894 $25,780
- ----------------------------------------------------------------
</TABLE>
Income tax expense differs from the amount computed by applying the U.S.
statutory federal income tax rate (35%) to income (loss) before income taxes as
a result of the following items:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1996 1995 1994
(Thousands of Dollars)
Computed tax expense
(benefit) at federal
statutory rates on
income (loss) before
income taxes $ (9,977) $71,296 $18,321
State income taxes,
net of federal tax
benefit 12,793 11,738 2,924
Amortization of
acquisition adjustments 19,075 19,257 5,977
Benefit arising from
low income
housing credits (3,494) (4,532) (2,876)
Nondeductible preferred
stock dividends of a
subsidiary 2,339 2,339 2,339
Other, net 2,310 (204) (905)
................................................................
Net income tax
expense $23,046 $99,894 $25,780
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Significant components of the net deferred tax liability consist of the
following:
- ----------------------------------------------------------------
<S> <C> <C>
December 31, 1996 1995
(Thousands of Dollars)
Plant and equipment $(266,219) $(225,338)
Equity in net losses of
affiliated companies (27,921) (25,946)
Unrealized gain on securities (6,341) (38,794)
Other 6,028 2,039
................................................................
Net deferred tax liability $(294,453) $(288,039)
- ----------------------------------------------------------------
</TABLE>
<PAGE>
================================================================================
Notes To Consolidated Financial Statements (Continued)
================================================================================
COX COMMUNICATIONS, INC.
Various consolidated federal income tax returns of CEI and state income
tax returns filed by Cox are presently under audit. However, in the opinion of
management, any additional tax liabilities resulting from these audits would not
have a material adverse impact on the consolidated financial position or
operating results of Cox.
NOTE 9
DEBT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
<S> <C> <C>
December 31, 1996 1995
(Thousands of Dollars)
Revolving credit facilities $ 449,999 $ 866,800
Commercial Paper, net of
unamortized discount of $3,296 718,704 -
Medium-term notes 166,082 41,804
6.375% Notes, due June 15, 2000,
net of unamortized discount
of $821 and $1,056 424,179 423,944
6.5% Notes, due November 15, 2002,
net of unamortized discount
of $517 and $605 199,483 199,395
6.875% Notes, due June 15, 2005,
net of unamortized discount and
hedging of $13,661 and $14,765 361,339 360,235
7.25% Debentures, due
November 15, 2015, net of
unamortized discount
of $880 and $934 99,120 99,066
7.625% Debentures, due June 15, 2025,
net of unamortized discount and
hedging of $18,128 and $18,291 131,872 131,709
Obligation to the FCC 251,918 251,918
Capitalized lease obligations 21,157 17,854
................................................................
Total debt $ 2,823,853 $ 2,392,725
- ----------------------------------------------------------------
</TABLE>
Revolving Credit Facilities
At December 31, 1996, Cox had a $1,200 million revolving credit facility
which matures on December 20, 2000. In addition, Cox had an $800 million
revolving credit facility which matures on October 9, 1997, at which time any
outstanding borrowings convert to a long-term loan due October 9, 2000. These
facilities are committed to back outstanding commercial paper as discussed
below.
At Cox's option, the interest rates on borrowings under the revolving
credit agreement are based on the London Interbank Offered Rate or the
certificate of deposit rate plus varying percentages or an alternate base rate.
In addition, the $1,200 million facility permits up to $500 million in
borrowings in any G-7 currency, with interest thereon based on the interbank
domestic eurocurrency rate for such currency. Interest rates under the revolving
credit facilities ranged from 5.69% to 6.94% and 6.31% to 6.69% during the years
ended December 31, 1996 and 1995, respectively. The credit facilities impose a
commitment fee on the unused portion of the total amount available of .09% to
.375% based on the ratio of debt to operating cash flow and a utilization fee of
.0625% to .1250% based on the level of borrowings.
These facilities contain covenants which, among other provisions, limit
Cox's ability to pay dividends and sell assets and require Cox to meet certain
requirements as to the ratio of debt to operating cash flow and the ratio of
operating cash flow to debt service. Historically, Cox has not paid dividends,
nor does Cox intend to pay dividends in the foreseeable future but to reinvest
future earnings, consistent with Cox's business strategy. Although Cox was in
compliance with its credit facility covenants, at December 31, 1996 Cox was
prohibited from paying dividends under certain requirements.
Commercial Paper
In June 1996, Cox entered into a commercial paper program under which Cox may
borrow $750 million. The commercial paper program is backed by amounts available
under the revolving credit facilities. The outstanding notes have maturities up
to 270 days and interest rates based on market. The interest rates for
outstanding commercial paper at December 31, 1996 ranged from 5.52% to 5.80%.
38
39
<PAGE>
COX COMMUNICATIONS, INC.
Medium-Term Notes
In April 1996, Cox filed a Form S-3 Registration Statement (the "Shelf
Registration") with the Securities and Exchange Commission under which Cox may
from time to time offer and issue debentures, notes, bonds or other evidence of
indebtedness for a maximum aggregate amount of $750 million. During 1996, Cox
sold $125 million of medium-term notes under the Shelf Registration. The notes
are due in varying amounts through November 2006 with interest at fixed rates
ranging from 6.94% to 7.19%. The net proceeds to Cox were approximately $124.3
million and the unamortized discount at December 31, 1996 was $0.7 million.
In addition, at December 31, 1996 and 1995, Cox had outstanding
borrowings under several fixed rate medium- term notes totaling $41.8 million.
The notes are due in varying amounts through 2023 and interest is fixed at rates
ranging from 7.125% to 8.875%.
6.375% Notes Due 2000
6.875% Notes Due 2005
7.625% Debentures Due 2025
In June 1995, Cox issued $425 million of unsecured
6.375% Notes Due 2000, $375 million of unsecured
6.875% Notes Due 2005 and $150 million of unsecured
7.625% Debentures Due 2025. In anticipation of the issuance of these debt
securities, Cox had entered into a series of transactions under a forward
treasury lock agreement in order to hedge its interest rate exposure. Such
hedging transactions totaled a notional amount of $100 million for the Notes Due
2005 and $100 million for the Debentures Due 2025. The hedging transactions were
settled at a total cost of approximately $32.3 million, which will be reflected
as adjustments to interest expense over the life of the Notes Due 2005 and
Debentures Due 2025. Amortization of the market discounts, underwriting
discounts and commissions and hedging and other issuance costs will increase the
effective interest rates on the Notes Due 2005 and Debentures Due 2025 to 7.452%
and 8.784%, respectively.
The debt securities may not be redeemed by Cox prior to maturity, nor
is Cox required to make mandatory redemption or sinking fund payments prior to
maturity. In addition, the debt securities contain certain restrictive covenants
relating to, among other things, liens on assets, indebtedness of restricted
subsidiaries, designation of restricted subsidiaries and mergers and sales of
assets.
6.5% Notes Due 2002
7.25% Debentures Due 2015
In November 1995, Cox issued $200 million of unsecured 6.5% Notes Due 2002 and
$100 million of unsecured
7.25% Debentures Due 2015. Amortization of the market discounts,
underwriting discounts and commissions and other issuance costs increased the
effective interest rates to 6.724% and 7.431%, respectively. Net proceeds to Cox
from the issuance of the debt securities were approximately $296 million after
market discounts, underwriting discounts and commissions and other issuance
costs.
The debt securities are redeemable in whole or in part, at Cox's
option, at fixed redemption prices. Cox is not required to make mandatory
redemption or sinking fund payments prior to maturity. In addition, the debt
securities contain certain restrictive covenants relating to, among other
things, liens on assets, indebtedness of restricted subsidiaries, designation of
restricted subsidiaries and mergers and sales of assets.
Obligation to the FCC
In March 1995, Cox was awarded a broadband PCS license for the Los Angeles-San
Diego MTA under the FCC's pioneer preference program at a cost to Cox of $251.9
million. Payments for the license are due in equal installments over 1998, 1999
and 2000, with a fixed interest rate of 7.75%.
Other
Maturities of long-term debt, including debt discount, for each of the five
years following December 31, 1996, are: $8.2 million, $89.3 million, $110.4
million, $1,686.5 million and $42.9 million, respectively. Commercial paper
outstanding at December 31, 1996 is classified as long-term as Cox intends to
refinance these borrowings on a long-term basis either through continued
commercial paper borrowings or utilization of other available credit facilities.
Included in the maturities of long-term debt are obligations under capital
leases of $5.9 million, $5.4 million, $4.5 million, $3.4 million and $1.7
million for each of the five years following December 31, 1996, respectively.
<PAGE>
================================================================================
Notes To Consolidated Financial Statements (continued)
================================================================================
COX COMMUNICATIONS, INC.
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," Cox estimated the fair value of its debt
instruments. The estimates are based on discounted cash flow analyses using
Cox's incremental borrowing rate for similar types of borrowing arrangements and
dealer quotations. Borrowings under current maturities, the revolving credit
agreements and commercial paper at December 31, 1996 and 1995 bear interest at
current market rates and, thus, approximate fair value. Remaining debt with a
carrying amount of $1,645.3 million and $1,519.8 million is estimated to have a
fair value of $1,671.6 million and $1,601.3 million at December 31, 1996 and
1995, respectively.
Note 10
Retirement Plans
Qualified Pension Plan
Effective January 1, 1996, Cox established the Cox Communications, Inc. Pension
Plan (the "CCI Plan"), a qualified noncontributory defined benefit pension plan.
The employees of the former Times Mirror cable television systems became
participants in the CCI Plan retroactive to the Merger date of February 1, 1995.
The remaining Cox employees, excluding certain key employees, participated in
the qualified noncontributory defined benefit pension plan of CEI (the "CEI
Plan") until August 1, 1996, when they entered the CCI Plan and plan assets were
transferred to the CCI Plan from CEI. Times Mirror also transferred plan assets
to the CCI Plan during 1996. Plan assets consist primarily of common stock,
investment-grade corporate bonds, cash and cash equivalents and U.S. government
obligations. The CCI Plan calls for benefits to be paid to eligible employees at
retirement based primarily upon years of service with Cox and compensation rates
near retirement. Current policy is to fund the CCI Plan in an amount that falls
between the minimum contribution required by ERISA and maximum tax deductible
contribution.
Total pension expense attributable to Cox employees' participation in
the CCI Plan and the CEI Plan was $5,180,000, $3,972,000 and $2,189,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
The reconciliation of the funded status of the CCI Plan at December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
(Thousands of Dollars)
Actuarial present value of:
Vested benefit obligation $ 22,212
Nonvested benefit obligation 1,259
- --------------------------------------------------------------------------------
Accumulated benefit obligation $ 23,471
- --------------------------------------------------------------------------------
Plan assets at fair value $ 78,425
Projected benefit obligation 68,486
- --------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 9,939
Unrecognized:
Net gain on plan assets (8,285)
Prior service costs 535
Net transition asset (1,346)
- --------------------------------------------------------------------------------
Prepaid pension cost $ 843
- --------------------------------------------------------------------------------
</TABLE>
The assumptions used in the actuarial computations at December 31, 1996 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Discount rate 7.75%
Rate of increase in compensation levels 5.50
Expected long-term rate of return on plan assets 9.00
- --------------------------------------------------------------------------------
</TABLE>
Nonqualified Pension Plan
Certain key employees of Cox participate in an unfunded, nonqualified
supplemental pension plan of CEI (the "Nonqualified CEI Plan") which has
generally the same benefit payout formula as the CCI Plan. Total pension expense
for Cox attributable to the Nonqualified CEI Plan was $1,386,000, $895,000 and
$713,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Other Retirement Plans
CEI provides certain health care and life insurance benefits to substantially
all retirees of Cox. Postretirement expense allocated to Cox by CEI was
$1,060,000, $888,000 and $1,013,000 for the years ended December 31, 1996, 1995
and 1994, respectively. Cox's accumulated postretirement benefit obligation
("APBO") at December 31, 1996 was $8,443,277. The funded status of the
postretirement plan covering the employees of Cox is not determinable. The APBO
for the postretirement plan of CEI substantially exceeded the fair value of
assets held in the plan at December 31, 1996.
40
- ----
41
<PAGE>
COX COMMUNICATIONS, INC.
Actuarial assumptions used to determine the APBO include a discount rate of
7.75% and an expected long-term rate of return on plan assets of 9%. The assumed
health care cost trend rate for retirees is 11.5%. For participants prior to age
65, the trend rate gradually decreases to 5.5% by year 2007 and remains level
thereafter. For retirees at age 65 or older, this rate decreases to 5.0% by year
2008. Increasing the assumed health care cost trend rate by one percentage point
would have resulted in an increase in the CEI plan's APBO of approximately 6.5%
and an increase in the aggregrate of the service cost and interest cost
components of the net periodic postretirement benefit cost of approximately 5.1%
for 1996.
In addition, substantially all of Cox's employees are eligible to
participate in the savings and investment plan of CEI. Under the terms of the
plan, Cox matches 50% of employee contributions up to a maximum of 6% of the
employee's base salary. Cox's expense under the plan was $4,504,000, $3,881,000
and $2,479,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
NOTE 11
STOCK COMPENSATION PLANS
At December 31, 1996, Cox had two stock-based compensation plans; a Long-Term
Incentive Plan ("LTIP") and an Employee Stock Purchase Plan ("ESPP"). Cox
applies APB Opinion 25 in accounting for its plans and, accordingly, since the
issue price of stock compensation awards equals or exceeds the current market
price, no compensation cost was recognized in 1996 and 1995 for these plans. Had
compensation cost for the LLP and ESPP been determined based on the fair value
at the grant dates for awards in 1996 and 1995 consistent with the provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," Cox's net income
(loss) and net income (loss) per share would have been reduced (increased) to
the pro forma amounts indicated below:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995
(Thousands of Dollars)
<S> <C> <C>
Net income (loss) - As reported $(51,551) $103,809
Net income (loss) - Pro Forma (55,807) 99,192
Net income (loss) per share - As reported $(0.19) N/A
Net income (loss) per share - Pro Forma (0.21) N/A
- --------------------------------------------------------------------------------
</TABLE>
Effective upon consummation of the Merger, Cox adopted a LTIP under which
executive officers and selected key employees are eligible to receive awards of
various forms of equity-based incentive compensation, including stock options,
stock appreciation rights, stock bonuses, restricted stock awards, performance
units and phantom stock. Cox has reserved 6,000,000 shares of Class A Common
Stock for issuance under the LTIP. The LTIP is to be administered by the
Compensation Committee of the Cox Board of Directors or its designee.
Options granted may be "Incentive Stock Options" or "Nonqualified Stock
Options." The exercise prices of the options are determined by the Compensation
Committee when the options are granted, subject to a minimum price of the fair
market value of teh Class A Common Stock on the date of grant. These options
become execisable over a period of three to five years from the date of grant
and expire 10 years from the date of grant. An accelerated vesting schedule has
been provided such that the options become fully vested if the market value of
the shares exceeds the exercise price by 140% for ten consecutive trading days.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1996 and 1995; expected volatility of 28%, no payment of dividends,
expected life of four years and risk-free interest rates of 5.6% and 7.0%,
respectively.
A summary of the status of Cox's stock options granted under the LTIP as of
December 31, 1996 and 1995 and changes during the years ending on those dates is
presented below:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
Wighted- Weighted
Average Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 1,506,253 $17.03 -- --
Granted 706,930 20.94 1,530,202 $17.03
Exercised (59,210) 16.98 -- --
Cancelled (146,278) 17.98 (23,949) 16.98
- --------------------------------------------------------------------------------
Outstanding at
end of year 2,007,695 $18.34 1,506,253 $17.03
- --------------------------------------------------------------------------------
Options exercisable
at year-end 18,851 59,277
Weighted-average fair
value of options
granted during
the year $9.17 $6.28
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
================================================================================
Notes To Consolidated Financial Statements (continued)
================================================================================
COX COMMUNICATIONS, INC.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options Outstanding
Weighted-Average Options Exercisable
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$16.98 1,317,512 8.25 $16.98 11,858 $16.98
$20.44 - $21.63 690,183 8.98 20.94 6,993 20.94
- -----------------------------------------------------------------------------------------------------------------------------
$16.98 - $21.63 2,007,695 8.50 $18.34 18,851 $18.44
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In June 1995, Cox adopted an ESPP, under which Cox was authorized and
did issue purchase rights totaling 750,000 shares of Class A Common Stock to
substantially all employees who had completed six months of service. Under the
terms of the ESPP, the purchase price was 90% of the market value on June 1,
1995 and employees were allowed to purchase the shares via payroll deductions
through August 31, 1997, at which time the shares will be issued to the
employees. During 1996 and 1995, 20,203 and 1,095 shares, respectively, were
issued to employees under the ESPP due to cancellation of employees'
participation in the ESPP or termination of employment. The fair value of the
employees' purchase rights granted in 1995 was estimated using the Black-Scholes
model with the following assumptions: expected volatility of 28%, no payment of
dividends, expected life of 2.25 years and risk-free interest rate of 5.8%. The
weighted-average fair value of each purchase right granted in 1995 was $4.38.
Prior to the Merger, certain of the executives and key employees of Cox
participated in certain CEI Unit Appreciation Plans ("UAP") that provided for
payment of benefits in the form of shares of CEI common stock, cash, or both,
generally five years after the date of award. The cost of awards made under the
plans was allocated to Cox by CEI over the applicable vesting periods and was
charged to operating expense. Amounts charged to expense for Cox employees for
the year ended December 31, 1994 was $4,419,000.
Units awarded under the UAP that would have matured in 1995, 1996 and
1997 were converted to 365,954 shares of restricted stock issued under the LTIP
in 1995. These restricted shares vested on January 1, 1997 following the end of
the original five-year UAP appreciation period, except that 34,684 shares vested
and 5,533 shares were canceled during 1995 and 1996 due to the retirement or
termination of certain participants.
Note 12
Shareholders' Equity
Cox is authorized to issue 286,000,000 shares of Class A Common Stock and
14,000,000 shares of Class C Common Stock. Except with respect to voting,
transfer and convertibility, shares of Class A Common Stock and Class C Common
Stock are identical in all respects. Holders of Class A Common Stock are
entitled to one vote per share and holders of Class C Common Stock are entitled
to ten votes per share. The Class C Common Stock is subject to significant
transfer restrictions and is convertible on a share for share basis into Class A
Common Stock at the option of the holder. In addition, Cox is authorized to
issue 5,000,000 shares of Preferred Stock. There are no issued or outstanding
shares of Preferred Stock at December 31, 1996.
In June 1995, Cox completed a public offering of 11,500,000 shares of
Class A Common Stock at a price of $18.875 per share. Cox also sold 8,298,755
shares of Class A Common Stock for $150,000,000 in a private placement to CEI.
Total proceeds to Cox were approximately $357,031,000, net of underwriting
discounts and commissions and other issuance costs of approximately $10,032,000.
As of December 31, 1996 and 1995, CEI owned approximately 75.3% of the
outstanding shares of Cox Common Stock and 83.1% of the voting power of Cox.
42
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43
<PAGE>
COX COMMUNICATIONS, INC.
NOTE 13
TRANSACTIONS WITH AFFILIATED COMPANIES
Cox borrows funds for working capital and other needs from CEI. Certain
management services are provided to Cox by CEI. Such services include legal,
corporate secretarial, tax, treasury, internal audit, risk management, benefits
administration and other support services. Cox was allocated expenses for the
years ended December 31, 1996, 1995 and 1994 of approximately $2,493,000,
$2,000,000 and $800,000, respectively, related to these services. Cox pays rent
and certain other occupancy costs to CEI for its headquarters office facilities,
which amounts approximated $3,000,000, $2,600,000 and $2,300,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Allocated expenses are
based on CEI's estimate of expenses related to the services provided to Cox in
relation to those provided to other divisions of CEI. Rent and occupancy expense
is allocated based on occupied space. Management believes that these allocations
were made on a reasonable basis. However, the allocations are not necessarily
indicative of the level of expenses that might have been incurred had Cox
contracted directly with third parties. Management has not made a study or any
attempt to obtain quotes from third parties to determine what the cost of
obtaining such services from third parties would have been. The fees and
expenses to be paid by Cox to CEI are subject to change.
In August 1996, CEI transferred to the CCI Plan a prepaid pension cost
of $1,816,000 which represents the excess of the plan assets over the projected
benefit obligation attributable to the Cox employees that had previously
participated in the CEI Plan. This transfer resulted in a contribution to
capital of $1,108,000, net of federal and state deferred tax liabilities of
$708,000.
In connection with the Merger, during 1995, CEI made additional capital
contributions to Cox of $43,844,000 by forgiving indebtedness in such amount
which Cox owed CEI.
In June 1995, CEI purchased 8,298,755 shares of Cox Class A Common Stock
for $150,000,000 in a private placement at a price per share equal to the public
offering price of the June 27, 1995 public offering less the underwriting
discounts thereon.
The amounts due to CEI are generally due on demand and represent the
net of various transactions, including those described above. Outstanding
amounts to CEI bear interest at fifty basis points above CEI's current
commercial paper borrowings. This rate as of December 31, 1996 and 1995 was 6.2%
and 6.6%, respectively.
Included in amounts due to (from) CEI are the following transactions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
(Thousands of Dollars)
Intercompany due to CEI, December 31, 1994 $ 37,813
Cash transferred from CEI 65,906
Net operating expense allocations
and reimbursements. 122,730
Contribution to capital (43,844)
- --------------------------------------------------------------------------------
Intercompany due to CEI, December 31, 1995 182,605
Cash transferred to CEI (282,829)
Net operating expense allocations
and reimbursements 158,479
Contribution to capital (1,108)
- --------------------------------------------------------------------------------
Intercompany due to CEI, December 31, 1996 $ 57,147
- --------------------------------------------------------------------------------
</TABLE>
In accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments," Cox has estimated the fair value of its
intercompany advances and notes payable. Given the short-term nature of these
advances, the carrying amounts reported in the balance sheets approximate fair
value.
Cox pays fees to certain entities in which it has an ownership interest
in exchange for cable television programming. Programming fees paid to such
affiliates for the years ended December 31, 1996, 1995 and 1994 were
approximately $24,535,000, $28,178,000 and $9,100,000, respectively.
NOTE 14
SUBSIDIARY PREFERRED STOCK
At December 31, 1996, a subsidiary of Cox has $177,000,000 of nonvoting
redeemable preferred stock outstanding. In exchange for the stock, the
subsidiary of Cox received $10,000,000 in cash upon issuance of the stock in
1990 and a note receivable due in January 2001 of $167,000,000.
<PAGE>
================================================================================
Notes To Consolidated Financial Statements (continued)
================================================================================
COX COMMUNICATIONS, INC.
The long-term notes receivable from the outside investor have been
netted against the preferred stock due to a right of offset. The net amount,
$10,000,000 at December 31, 1996 and 1995, has been included in other
liabilities in the Consolidated Balance Sheets.
The subsidiaries pay annual dividends of approximately $6,700,000 in
the aggregate on the outstanding preferred stock, which have been recorded as a
reduction of interest income on the notes.
NOTE 15
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1996 1995 1994
(Thousands of Dollars)
Significant noncash
transactions:
Debt assigned by CEI - - $204,727
Capital contributions
by CEI $ 1,108 $ 43,844 294,185
Cox Common Stock
issued in connection
with the Merger - 932,000 -
Debt assumed in
connection with Merger - 1,364,000 -
Purchase of PCS license - 251,918 -
TeleWest Merger
stock exchange - 407,800 -
Capitalized lease
obligations 11,408 17,177
Additional cash flow
information:
Cash paid for interest $ 143,094 $ 141,692 $ 43,584
Cash paid for income
taxes 108,964 52,135 32,563
- --------------------------------------------------------------------------
</TABLE>
NOTE 16
COMMITMENTS AND CONTINGENCIES
Cox leases land, office facilities and various items of equipment under
noncancellable operating leases. Rental expense under operating leases amounted
to $19,009,000 in 1996, $15,660,000 in 1995 and $11,551,000 in 1994. Future
minimum lease payments as of December 31, 1996 for all noncancellable operating
leases are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
<S> <C>
(Thousands of Dollars)
1997 $ 6,151,000
1998 5,417,000
1999 4,352,000
2000 4,058,000
2001 3,604,000
Thereafter 16,718,000
- -------------------------------------------------------------
Total $ 40,300,000
- -------------------------------------------------------------
</TABLE>
At December 31, 1996, Cox had outstanding purchase commitments totaling
approximately $42,529,000 for additions to plant and equipment and $86,820,000
to rebuild certain existing cable systems. Other commitments include
approximately $173,000,000 to fund the operations of Sprint PCS and PhillieCo.
This amount may vary significantly depending on numerous factors, such as
financing alternatives for Sprint PCS. Additionally, upon the transfer to
PioneerCo of the PCS license for the Los Angeles-San Diego MTA and the related
obligation to the FCC, as discussed in Note 6, Cox will be committed to fund
$165,000,000 for the operations of PioneerCo.
44
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45
<PAGE>
COX COMMUNICATIONS, INC.
Cox has guaranteed borrowings of certain affiliates totaling
approximately $2,519,000 at December 31, 1996. Cox has unused letters of credit
outstanding totaling $3,494,000 at December 31, 1996, as required under
agreements with its franchise authorities.
Many franchising authorities have become certified by the FCC to
regulate rates charged by Cox for basic cable service and associated basic cable
service equipment. Some local franchising authority decisions have been rendered
that were adverse to Cox. In addition, a number of such franchising authorities
and customers of Cox filed complaints with the FCC regarding the rates charged
for cable programming services. In December 1995, the FCC approved a Resolution
of all outstanding rate complaints covering the Cox and former Times Mirror
cable television systems. The Resolution, among other things, provided for the
payment of refunds of $7,120,000 plus interest to one million customers in
January 1996, and the removal of additional outlet charges for regulated
services from all of the former Times Mirror cable television systems. The
Resolution also stated that Cox's cable programming services tier rates as of
June 30, 1995 were not unreasonable. Refunds under the Resolution were fully
provided for in Cox's financial statements at December 31, 1995. In January
1996, the City of Irvine and six other cities located in California filed an
appeal to set aside the Resolution in the United States Court of Appeals for the
Ninth Circuit. The FCC is a party to the appeal and Cox has been granted leave
to intervene. Cox cannot predict the outcome of this appeal.
Cox is a party to various other legal proceedings that are ordinary and
incidental to its business. Management does not expect that any legal
proceedings currently pending will have a material adverse impact on Cox's
consolidated financial position or consolidated results of operations.
<PAGE>
Note 17
Unaudited Quarterly Financial Information
The following table sets forth selected historical quarterly financial
information for Cox. This information is derived from unaudited financial
statements of Cox and includes, in the opinion of management, all normal and
recurring adjustments that management considers necessary for a fair
presentation of the results for such periods.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
(Millions of Dollars, except
per share data)
Complete basic $247.6 $246.5 $245.9 $ 255.1
New product tier 3.2 3.4 3.5 4.1
Premium service 47.6 47.8 47.3 46.3
Pay-per-view 12.9 9.9 10.2 12.6
Advertising 17.3 18.7 21.5 24.0
Satellite 17.7 19.2 22.1 24.2
Other 11.2 11.9 13.3 15.3
................................................................................
Total revenues 357.5 357.4 363.8 381.6
Programming costs 89.0 85.7 88.0 90.1
Plant operations 34.8 34.5 35.8 35.7
Marketing 10.7 11.7 11.0 9.7
General and administrative 70.9 72.3 71.6 76.2
Satellite operating and administrative 15.7 17.6 19.3 23.1
Depreciation 55.9 63.2 61.0 84.1(a)
Amortization 18.5 17.6 17.5 17.4
................................................................................
Operating income $ 62.0 $ 54.8 $ 59.6 $ 45.3
- --------------------------------------------------------------------------------
Net income (loss) $ 7.3 $ 27.0 $ (28.1) $ (57.8)
Net income (loss) per share $ 0.03 $ 0.10 $ (0.10) $ (0.21)
- --------------------------------------------------------------------------------
</TABLE>
(a) Depreciation for the fourth quarter of 1996 includes accelerated
depreciation of $18.5 million as a result of the upgrade and rebuild of the
broadband network.
46
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47
<PAGE>
<TABLE>
<CAPTION>
1995
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
(Millions of Dollars, except per
share data)
Complete basic $191.0 $229.4 $234.1 $243.8
New product tier 1.8 2.8 3.2 2.3
Premium service 42.5 48.1 47.5 47.0
Pay-per-view 7.1 12.7 12.7 9.8
Advertising 12.5 16.8 17.7 24.6
Satellite 8.1 9.1 10.5 13.4
Other 8.2 9.2 9.4 10.9
................................................................................
Total revenues 271.2 328.1 335.1 351.8
Programming costs 67.5 81.0 81.2 84.7
Plant operations 29.2 33.8 32.0 33.2
Marketing 7.4 10.5 11.3 8.5
General and administrative 55.5 67.1 72.3 70.9
Satellite operating and administrative 8.8 10.2 9.9 12.8
Restructuring charge - - - 5.1
Depreciation 43.8 45.4 51.3 58.3
Amortization 13.1 19.3 18.2 17.9
................................................................................
Operating income $ 45.9 $ 60.8 $ 58.9 $ 60.4
- --------------------------------------------------------------------------------
Net income (loss) $ 1.8 $ 5.0 $(14.0) $111.0
Net income (loss) per share N/A $ 0.02 $(0.05) $ 0.41
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Board of Directors and Shareholders
Cox Communications, Inc.
We have audited the accompanying consolidated balance sheets of Cox
Communications, Inc. (Cox) as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of Cox's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cox
Communications, Inc. at December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
During 1994, Cox changed its method of accounting for certain
investments in equity securities to conform with Statement of Financial
Accounting Standards No. 115.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 7, 1997
48
- ----
49
<PAGE>
Shareholder Information
(Back Cover)
Shareholder Information
Corporate Headquarters:
Cox Communications, Inc.
1400 Lake Hearn Dr., NE
Atlanta, GA 30319
404-843-5000
http://www.cox.com
Stock Data: Cox's Class A Common Stock is traded on the New York Stock
Exchange. Ticker symbol: COX. Daily newspaper stock table listing: CoxComm A.
As of February 1, 1997, there were 3,726 shareholders of record of Cox's Class
A Common Stock and two shareholders of record of the Class C Common Stock.
There is no established trading market for Cox's Class C Common Stock. There
have been no stock dividends paid on any of Cox's equity securities. Cox does
not intend to pay cash dividends in the foreseeable future. See "Management's
Discussion and Analysis - Liquidity and Capital Resources - uses of Cash," page
23.
Quarterly Market Information:
Class A Common Stock
High Low
1996
First Quarter $24 1/8 $18 7/8
Second Quarter 23 1/4 19 3/4
Third Quarter 22 3/8 17 5/8
Fourth Quarter 23 1/8 16 5/8
1995
First Quarter $18 $15 3/4
Second Quarter 20 1/4 14
Third Quarter 21 1/2 19
Fourth Quarter 20 5/8 17 3/4
Transfer Agent and Registrar:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
201-324-1225
http://www.fctc.com
[email protected]
Annual Meeting of Shareholders:
April 17, 1997, 9 a.m.
Cox Corporate Headquarters
1400 Lake Hearn Dr., NE
Atlanta, GA 30319
Form 10-K: Cox Communications' Annual Report on Form 10-K as filed with the
Securities and Exchange Commission is available free upon written request to:
Finance Department, Cox Communications, Inc., at the address above.
Company Information: Communications regarding stock transfers, lost
certificates or account changes should be directed to the transfer agent, First
Chicago Trust Company of New York. For other information, contact one of the
following:
Analysts/Institutional Investors: Dallas Clement, Treasurer, 404-843-5677,
fax: 404-843-5939
Individual Shareholders: Anthony Surratt, Manager of Communications,
404-843-5124, fax: 404-843-5777
News Media: Ellen East, Director of Communications, 404-843-5854, fax:
404-843-5777
Independent Auditors:
Deloitte & Touche LLP
100 Peachtree St.
Suite 1700
Atlanta, GA 30303-1943
404-220-1500
[COX LOGO APPEARS HERE]
1400 Lake Hearn Drive, NE
Atlanta, Georgia 30319
404-843-5000
http://www.cox.com
<PAGE>
EXHIBIT 21
Subsidiaries of Cox Communications Inc. as of March 17, 1997
<TABLE>
<S> <C>
CableRep, Inc.........................................................Delaware
Cox@Home, Inc.........................................................Delaware
CoxCom, Inc...........................................................Delaware
Cox Arizona Telcom, Inc...............................................Delaware
Cox Cable New York City, Inc..........................................New York
Cox California PCS, Inc...............................................Delaware
Cox California Telecom, Inc...........................................Delaware
Cox Communications Bakersfield, Inc...................................Delaware
Cox Communications Connecticut, Inc...................................Delaware
Cox Communications E.T.E., Inc........................................Delaware
Cox Communications Gainesville/Ocala, Inc.............................Delaware
Cox Communications Greater Ocala, Inc.................................Delaware
Cox Communications Hampton Roads, Inc.................................Delaware
Cox Communications Holdings, Inc......................................Delaware
Cox Communications Humboldt, Inc......................................Delaware
Cox Communications International, Inc.................................Delaware
Cox Communications Lafayette, Inc.....................................Delaware
Cox Communications Louisiana, Inc.....................................Delaware
Cox Communications NCC, Inc...........................................Delaware
Cox Communications New Orleans, Inc...................................Delaware
Cox Communications of Australia, Inc..................................Delaware
Cox Communications Ohio, Inc..........................................Ohio
Cox Communications Oklahoma City, Inc.................................Delaware
Cox Communications Palos Verdes, Inc..................................California
Cox Communications Payroll, Inc.......................................California
Cox Communications Pensacola, Inc.....................................Delaware
Cox Communications Phoenix, Inc.......................................Arizona
Cox Communications Pioneer, Inc.......................................Delaware
Cox Communications Roanoke, Inc.......................................Delaware
Cox Communications San Diego, Inc.....................................Delaware
Cox Communications Santa Barbara, Inc.................................Delaware
Cox Communications Services, Inc......................................Delaware
Cox Communications Shopping Services, Inc.............................Delaware
Cox Communications St. Charles Parish, Inc............................Delaware
Cox Communications Virginia Beach, Inc................................Delaware
Cox Communications West Texas, Inc....................................Delaware
Cox Communications Wireless, Inc......................................Delaware
Cox Consumer Information Network, Inc.................................Delaware
Cox DC Radio, Inc.....................................................Delaware
Cox Fibernet Access Services, Inc.....................................Virginia
Cox Fibernet Commercial Services, Inc.................................Virginia
Cox Fibernet Louisiana, Inc...........................................Delaware
Cox Fibernet Oklahoma, Inc............................................Delaware
Cox Fibernet Virginia, Inc............................................Delaware
Cox Home Video North, Inc.............................................Delaware
Cox Louisiana Telecom, Inc............................................Delaware
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Cox Nebraska Telcom, Inc..............................................Delaware
Cox Oklahoma Telcom, Inc..............................................Delaware
Cox Programming International, Inc....................................Delaware
Cox Programming Limited..........................................United Kingdom
Cox Rhode Island Telcom, Inc..........................................Delaware
Cox Satellite, Inc....................................................Delaware
Cox Satellite Services, Inc...........................................Delaware
Cox Telcom Partners, Inc..............................................Delaware
Cox Teleport Partners, Inc............................................Delaware
Cox Teleport Partners II, Inc.........................................Delaware
Cox Telephony Partners, Inc...........................................Delaware
PCS Leasing Co., Inc..................................................Delaware
TMJV, Inc.............................................................Delaware
Video Service Company.................................................Ohio
Cable Network Services, L.L.C.........................................Delaware
Cox Connecticut Telcom, LLC...........................................Delaware
Cox Oklahoma II, L.L.C................................................Delaware
Outdoor Life Network, L.L.C...........................................Delaware
Speedvision Network, L.L.C............................................Delaware
TWC Cable Partners............................................................
TWC/TVRO Service Partnership..................................................
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference of our report dated
February 7, 1997 appearing in this Annual Report on Form 10-K of Cox
Communications, Inc. for the year ended December 31, 1996, in the following
Registration Statements of Cox Communications, Inc. and to the reference to us
under the heading "Experts" in the Registration Statement on Form S-3:
Form File No.
------ ---------
S-8 33-80993
S-8 33-80995
S-8 33-91506
S-8 33-93148
S-3 333-03351
S-3 333-03766
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 27, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-80993, 33-80995, 33-91506 and 33-93148) on Form S-8 and the
Registration Statements (Nos. 333-03351 and 333-03766) on Form S-3 of Cox
Communications, Inc. of our report dated March 14, 1997 on the consolidated
financial statements of Sprint Spectrum Holding Company, L.P. and subsidiaries
(which expresses an unqualified opinion and includes an explanatory paragraph
referring to the developmental stage of Sprint Spectrum Holding Company, L.P.
and subsidiaries) for each of the two years in the period ended December 31,
1996, for the period from October 24, 1994 (date of inception) to December 31,
1994 and for the cumulative period from October 24, 1994 (date of inception) to
December 31, 1996 appearing in the Annual Report on Form 10-K of Cox
Communications, Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 25, 1997
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Annual Report on Form 10-K
of Cox Communications, Inc. for the year ended December 31, 1996 of our report
dated February 21, 1997 (February 28, 1997 and March 1, 1997 as to Note 3),
appearing in the Annual Report on Form 10-K of Teleport Communications Group
Inc. for the year ended December 31, 1996 and in the following Registration
Statements of Cox Communications, Inc.:
Form File No.
------ ---------
S-8 33-80993
S-8 33-80995
S-8 33-91506
S-8 33-93148
S-3 333-03351
S-3 333-03766
DELOITTE & TOUCHE LLP
New York, New York
March 28, 1997
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-80993, 33-80995, 33-91506 and 33-93148 on Form S-8 and in Registration
Statements Nos. 333-03351 and 333-03766 on Form S-3 of Cox Communications, Inc.
of our report dated February 7, 1997 (relating to the combined consolidated
financial statements of Cox Communications PCS, L.P. and Cox California PCS,
Inc., development stage enterprises) appearing in this Annual Report on
Form 10-K of Cox Communications, Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 27, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements (Nos. 333-03351 and 333-03766)
on Form S-3, and the Registration Statements (Nos. 33-80993, 33-80995, 33-91506,
and 33-93148) on Form S-8 of Cox Communications, Inc. of our report dated
March 7, 1997 on the financial statements of American PCS, L.P. (A Delaware
Limited Partnership) as of and for the year ended December 31, 1996 referred to
in the consolidated financial statements of Sprint Spectrum Holding Company,
L.P. and subsidiaries, which appears in the Annual Report on Form 10-K of Cox
Communications, Inc. for the year ended December 31, 1996.
PRICE WATERHOUSE LLP
Washington, DC
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
YEAR ENDED 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 42,349
<SECURITIES> 0
<RECEIVABLES> 130,352
<ALLOWANCES> (7,778)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 2,343,023
<DEPRECIATION> (811,212)
<TOTAL-ASSETS> 5,784,590
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> (270,263)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> (5,784,590)
<SALES> 0
<TOTAL-REVENUES> (1,460,285)
<CGS> 0
<TOTAL-COSTS> 569,291
<OTHER-EXPENSES> 335,161
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146,077
<INCOME-PRETAX> 28,505
<INCOME-TAX> 23,046
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,551
<EPS-PRIMARY> .19
<EPS-DILUTED> 0
<FN>
<F1>non-classified balance sheet
</FN>
</TABLE>
<PAGE>
Exhibit 99.1
COX COMMUNICATIONS PCS, L.P.
AND COX CALIFORNIA PCS, INC.
(Development Stage Enterprises)
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE PARTNERS
COX COMMUNICATIONS PCS, L.P.
IRVINE, CALIFORNIA
WE HAVE AUDITED THE ACCOMPANYING COMBINED CONSOLIDATED BALANCE SHEET OF COX
COMMUNICATIONS PCS, L.P. AND SUBSIDIARY AND COX CALIFORNIA PCS, INC. AND
SUBSIDIARY, DEVELOPMENT STAGE INTERPRISES, AS OF DECEMBER 31, 1996 AND THE
RELATED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS, PARTNERS' CAPITAL AND
CASH FLOWS FOR THE YEAR THEN ENDED AND THE PERIOD FROM FEBRUARY 28, 1995 (DATE
OF INCEPTION) THROUGH DECEMBER 31, 1996. THESE FINANCIAL STATEMENTS ARE THE
RESPONSIBILITY OF THE PARTNERSHIP'S AND THE COMPANY'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON
OUR AUDIT.
WE CONDUCTED OUR AUDIT IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING STANDARDS.
THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN REASONABLE
ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDIT PROVIDES A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, SUCH COMBINED CONSOLIDATED FINANCIAL STATEMENTS PRESENT FAIRLY,
IN ALL MATERIAL RESPECTS, THE COMBINED FINANCIAL POSITION OF COX COMMUNICATIONS
PCS, L.P. AND SUBSIDIARY AND COX CALIFORNIA PCS, INC. AND SUBSIDIARY AS OF
DECEMBER 31, 1996 AND THE RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR
THE YEAR THEN ENDED AND THE PERIOD FROM FEBRUARY 28, 1995 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1996 IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
DELOITTE & TOUCHE LLP
COSTA MESA, CALIFORNIA
FEBRUARY 7, 1997
<PAGE>
COX COMMUNICATIONS PCS, L.P.
AND COX CALIFORNIA PCS, INC.
(Development Stage Enterprises)
COMBINED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,791,991
Accounts receivable 765,422
Receivable from partner 2,450,000
Receivable from parent 18,450,000
Inventories 1,919,257
Prepaid expenses and other current assets 1,004,036
------------
Total current assets 26,380,706
PROPERTY AND EQUIPMENT (Notes 2 and 3) 197,516,168
OTHER ASSETS 281,396
------------
$224,178,270
============
LIABILITIES AND PARTNERS' CAPITAL AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $106,153,459
Due to parent 85,610
Due to exclusive limited partner (Note 4) 8,976,500
Accrued liabilities 7,854,614
------------
Total current liabilities 123,070,183
MINORITY INTEREST 2,450,000
PARTNERS' CAPITAL AND STOCKHOLDER'S DEFICIT:
Partners' capital:
General partner
Exclusive limited partner 165,368,633
Other capital 22,436,237
Due from exclusive limited partner (22,436,237)
Stockholder's deficit:
Common stock, $1.00 par value; 1,000 shares
authorized; 100 shares issued and outstanding 100
Deficit accumulated during development stage (66,710,646)
------------
Total partners' capital and stockholder's deficit 98,658,087
------------
$224,178,270
============
</TABLE>
<PAGE>
COX COMMUNICATIONS PCS, L.P.
AND COX CALIFORNIA PCS, INC.
(Development Stage Enterprises)
COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
28-Feb-95
(date of inception)
Year ended through
31-Dec-96 31-Dec-96
--------------- ---------------
<S> <C> <C>
REVENUES $ 692,240 $ 692,240
COST OF SALES 4,039,684 4,039,684
------------ ------------
GROSS LOSS (3,347,444) (3,347,444)
NETWORK EXPENSES 3,705,468 3,778,767
SALES AND MARKETING 4,020,451 4,020,451
PAYROLL 21,397,873 23,620,103
GENERAL AND ADMINISTRATIVE 26,402,602 29,956,311
DEPRECIATION AND AMORTIZATION 1,996,796 2,100,783
------------ ------------
LOSS FROM OPERATIONS (60,870,634) (66,823,859)
OTHER INCOME - Interest income 113,213 113,213
------------ ------------
NET LOSS $(60,757,421) $(66,710,646)
============= =============
</TABLE>
<PAGE>
COX COMMUNICATION PCS, L.P.
AND COX CALIFORNIA PCS, INC.
(Development Stage Company)
COMBINED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
AND STOCKHOLDER'S DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM FEBRUARY 28, 1995 (DATE
OF INCEPTION) THROUGH DECEMBER 31, 1996.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cox California PCS, Inc. Cox Communications PCS, L.P.
---------------------------- ----------------------------------------------------------------
Accumulated Due from
Deficit During Exclusive Exclusive
Common Development General Limited Other Limited
Stock Stage Partner Partner Capital Partner
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
February 28,
1995 (date of
inception) $ - $ - $ - $ - $ - $ -
Common
stock issued
for cash 100
Net loss (5,953,225)
------- ------------ ----------- ------------ ----------- -----------
BALANCES,
December 31,
1995 100 (5,953,225)
Additional
contribution
(Note 1) 22,436,237 (22,436,237)
Contributions
(Note 1) 165,368,633
Net loss (60,757,421)
------- ------------ ----------- ------------ ----------- ------------
BALANCES,
December 31,
1996 $100 $(66,710,646) $ - $165,368,633 $22,436,237 $(22,436,237)
======= ============ =========== ============ =========== ============
</TABLE>
See notes to combined consolidated financial statements.
<PAGE>
COX COMMUNICATIONS PCS, L.P.
AND COX CALIFORNIA PCS, INC.
(Development Stage Enterprises)
COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
28-Feb-95
(date of inception)
Year ended through
31-Dec-96 31-Dec-96
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(60,757,421) $(66,710,646)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,996,896 2,100,783
Changes in operating assets and liabilities:
Accounts receivable (765,422) (765,422)
Receivable from parent 3,154,264
Inventories (1,919,257) (1,919,257)
Prepaid expenses and other current assets (928,027) (1,004,036)
Other assets (150,099) (281,396)
Accounts payable 16,029,942 22,612,670
Accrued liabilities 7,854,614 7,854,614
Due to partner 8,976,500 8,976,500
------------- -------------
Net cash used in operating activities (26,508,010) (29,136,190)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (190,713,373) (199,616,951)
Accounts payable related to acquisition of property
and equipment 83,540,789 83,540,789
------------- -------------
Net cash used in investing activities (107,172,584) (116,076,162)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 100
Capital contribution - minority partner 2,450,000 2,450,000
Capital contribution - exclusive limited partner 165,368,633 165,368,633
Advances from parent 129,183,963 141,501,847
Receivable from partner (2,450,000) (2,450,000)
Repayment of advances from parent (159,866,237) (159,866,237)
------------- -------------
Net cash provided by financing activities 134,686,359 147,004,343
------------- -------------
NET INCREASE IN CASH $1,005,765 $1,791,991
CASH, beginning of period 786,226
------------- -------------
CASH, end of period $ 1,791,991 $ 1,791,991
============= =============
</TABLE>
See notes to combined consolidated financial statements.
<PAGE>
COX COMMUNICATIONS PCS, L.P.
AND COX CALIFORNIA PCS, INC.
(Development Stage Enterprises)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM FEBRUARY 28, 1995
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. DESCRIPTION OF ENTITIES AND BASIS OF PRESENTATION
Description of Entities - Cox California PCS, Inc. (the Company) is a Delaware
corporation which began building a personal communications services (PCS) system
in southern California. The Company is considered to be in the development
stage as defined under Financial Accounting Standards (SFAS) No. 7, Accounting
and Reporting by Development Stage Enterprises.
Cox Communications PCS, L.P. (the Partnership) is a limited partnership formed
on December 31, 1996 pursuant to the provisions of the Delaware Revised Uniform
Limited Partnership Act as described in the Agreement of Limited Partnership of
Cox Communications PCS, L.P., a Delaware limited partnership (the Agreement).
The Partnership will continue until the occurrence of a Liquidating Event, as
described in the Agreement. The Agreement specifies that the General Partner
will be the Managing Partner of the Partnership, until the occurrence of certain
specified events. The Managing Partner has the authority and responsibility to
adopt a business plan and budget for the Partnership, appoint senior management
of the Partnership, and invest funds for the Partnership. The Partnership
purchased all of the operations of the Company on December 31, 1996, is
completing construction of the PCS system in southern California and will market
its services as the system is completed in each geographical area. The
Partnership is considered to be in the development stage as defined under SFAS
No. 7.
The Partnership is 51% owned by Cox Pioneer Partnership (the General Partner)
and 49% owned by Sprint Spectrum Holding Company, L.P. (the Exclusive Limited
Partner). Required contributions to the Partnership include cash contributions
from the Exclusive Limited Partner of $371,358,405. Effective December 31,
1996, the Partnership received a contribution of $165,368,633 from the Exclusive
Limited Partner. The General Partner intends to contribute the Los Angeles MTA
Block "A" 30 Mhz PCS license (the License) owned by Cox Communications, Inc.,
the majority partner in Cox Pioneer Partnership, net of the related debt, to the
Partnership upon approval by the Federal Communications Commission (FCC). If
the FCC consents to the assumption of this related debt by the Partnership,
along with certain other criteria, then the General Partner will be obligated to
contribute to the Partnership cash in an aggregate amount equal to this related
debt, plus adjustments as described by the Agreement. Additional capital
contributions by the partners will be made in accordance with the Agreement.
Profits and losses will be allocated between the partners as described by the
Agreement, generally in proportion to their percentage interests (51% for the
General Partner and 49% for the Exclusive Limited Partner).
The Agreement specifies that concurrent with the making of each capital
contribution, the Exclusive Limited Partner is required to pay to the
Partnership an additional contribution at 7.25% on the amount, if any, by which
their required cash contribution exceeds the aggregate cash capital
contributions they previously made. For this purpose, the additional
contribution began to accrue on March 1, 1996. This unpaid additional
contribution of $22,436,237 as of December 31, 1996 has been reflected in the
accompanying combined consolidated financial statements as a separate component
of
6
<PAGE>
COX COMMUNICATIONS PCS, L.P.
AND COX CALIFORNIA PCS, INC.
(Deveopment Stage Enterprises)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM FEBRUARY 28, 1995
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
partners' capital. The due from exclusive limited partner has been shown as a
reduction of partners' capital until such payment is received. If the FCC debt
is assumed by the Partnership, the Agreement requires the General Partner to
make similar additional contributions. No related additional contribution has
been reflected in these combined consolidated financial statements as of
December 31, 1996.
Pursuant to the System Assets Sales and Expenditure Reimbursement Agreement,
effective December 31, 1996, the Partnership purchased from the Company all
System Assets (as defined) and assumed all related liabilities. The System
Assets were purchased and the related liabilities were assumed at their recorded
net book values, which approximate their fair values, as of December 31, 1996
(Note 3). Additionally, effective December 31, 1996, the Partnership reimbursed
the Company for qualified pre-operating expenses, research and experimental
expenditures and startup expenditures (as defined), including interest. These
amounts totaled approximately $66,625,000.
Basis of Presentation - The accompanying combined consolidated financial
statements represent a combination of the accounts of the Company and its
wholly-owned subsidiary, PCS Leasing Co., Inc., and the accounts of the
Partnership and its 51% partnership interest in the accounts of PCS Leasing Co.,
L.P. Minority interests in the equity of PCS Leasing Co., L.P. (held by Sprint
Spectrum Holding Company, L.P.) are shown separately in the accompanying
combined consolidated financial statements. All significant intercompany
transactions and balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Depreciation - Depreciation of property and equipment commences when assets are
placed in service and is provided over the estimated lives of the respective
assets of 3 to 40 years using the straight-line method.
Income Taxes - No provision has been made for federal and state taxes for the
Partnership because these taxes are the responsibility of the individual
partners.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
This statement requires the recognition of deferred tax assets and liabilities
for the future consequences of events that have been recognized in the Company's
financial statements or tax returns. Measurement of the deferred items is based
on enacted tax laws. In the event the future consequences of differences
between financial reporting bases and tax bases of the Company's assets and
liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation
of the probability of being able to realize the future benefits indicated by
such asset. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or all of the deferred tax
asset will not be realized.
7
<PAGE>
COX COMMUNICATIONS PCS, L.P.
AND COX CALIFORNIA PCS, INC.
(Development Stage Enterprises)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM FEBRUARY 28, 1995
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost (the purchase price paid by the
Partnership), is as follows:
Equipment............................................. $ 73,682,110
Furniture and fixtures................................ 19,854,078
Capitalized software.................................. 15,769,629
Construction in progress.............................. 88,210,351
------------
$197,516,618
============
4. RELATED PARTY TRANSACTIONS
Proceeds from the parent of the Company have been used to purchase equipment
and to design and construct the communications system. These amounts were
repaid on December 31, 1996 as discussed in Note 1.
The Exclusive Limited Partner performs certain services on behalf of the
Partnership. Related amounts included in the combined consolidated statement of
operations for the year ended December 31, 1996 are approximately $8,977,500.
8
<PAGE>
COX COMMUNICATIONS PCS, L.P.
AND COX CALIFORNIA PCS, INC.
(Development Stage Enterprises)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM FEBRUARY 28, 1995
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
5. COMMITMENTS
Future minimum lease payments under noncancelable operating facility,
equipment and auto leases as of December 31, 1996 are as follows:
Year ending December 31:
1997.................................................. $10,665,856
1998.................................................. 10,744,702
1999.................................................. 10,296,741
2000.................................................. 9,413,450
2001.................................................. 7,849,930
Thereafter............................................ 10,829,631
-----------
$59,800,310
============
The Partnership has entered into an affiliation agreement (the Affiliation
Agreement) with the Exclusive Limited Partner effective December 31, 1996.
The Affiliation Agreement requires the Partnership to pay an affiliation fee
to the Exclusive Limited Partner on a monthly basis in an amount equal to
2.75% of the first $25,000,000 of gross revenues, plus 2% of the second
$25,000,000 of gross revenues, plus 1.5% of gross revenues in excess of
$50,000,000. The initial term of the Affiliation Agreement is ten years, but
will be automatically renewed for successive five-year renewal periods (for
a maximum of 50 years, including the initial term) unless one year prior to
the commencement of a renewal period either party notifies the other that it
does not wish to renew this Affiliation Agreement.
6. INCOME TAXES
The Company files tax returns in a consolidated group with its parent. For
financial statement reporting purposes, the Company records income taxes as
if it were a separate taxpayer. If the Company were a separate taxpayer, as
of December 31, 1996, it would have a net operating loss carryforward of
approximately $86,000, which would expire in 2010.
9
<PAGE>
COX COMMUNICATIONS PCS, L.P.
AND COX CALIFORNIA PCS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
10
<PAGE>
EXHIBIT 99.2
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995, FOR THE PERIOD FROM OCTOBER 24, 1994 (DATE OF INCEPTION) TO DECEMBER 31,
1994 AND FOR THE CUMULATIVE PERIOD FROM OCTOBER 24, 1994 (DATE OF INCEPTION) TO
DECEMBER 31, 1996, AND INDEPENDENT AUDITORS' REPORT
<PAGE>
[DELOITTE & TOUCH LLP LOGO SHOULD BE HERE]
INDEPENDENT AUDITORS' REPORT
Partners of Sprint Spectrum Holding Company, L.P.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of Sprint Spectrum
Holding Company, L.P. and subsidiaries (the "Partnership"), development stage
enterprises, as of December 31, 1996 and 1995, and the related consolidated
statements of operations, changes in partners' capital and cash flows for each
of the two years in the period ended December 31, 1996, for the period from
October 24, 1994 (date of inception) to December 31, 1994 and for the cumulative
period from October 24, 1994 (date of inception) to December 31, 1996. These
consolidated financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the 1996 financial
statements of American PCS, L.P. ("APC") an investment of the Partnership which
is accounted for by use of the equity method. The Partnership's share of APC's
net loss for the year ended December 31, 1996 was $96,850,000 and is included in
the accompanying consolidated financial statements. The financial statements of
APC were audited by other auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to the amounts included for APC, is based
solely on the reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
<PAGE>
In our opinion, based on our audits and the reports of other auditors, such
consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Sprint Spectrum Holding Company, L.P. and
subsidiaries at December 31, 1996 and 1995 and the results of their operations
and their cash flows for the years then ended and for the period from October
24, 1994 (date of inception) to December 31, 1994 and for the cumulative period
from October 24, 1994 (date of inception) to December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, Sprint Spectrum
Holding Company, L.P. and its subsidiaries are in the development stage as of
December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 14, 1997
<PAGE>
[LETTERHEAD OF PRICE WATERHOUSE LLP APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
In our opinion, the balance sheet and the related statements of loss, of changes
in partners' capital and cash flows (not presented separately herein) present
fairly, in all material respects, the financial position of American PCS, L.P.
at December 31, 1996, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Washington, DC
March 7, 1997
<PAGE>
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 69,988 $ 1,123
Accounts receivable, net......................... 3,310 -
Receivable from affiliates....................... 12,901 340
Inventory........................................ 72,414 -
Prepaid expenses and other assets, net........... 14,260 188
Note receivable--unconsolidated partnership...... 226,670 655
--------------- ---------------
Total current assets........................... 399,543 2,306
INVESTMENT IN PCS LICENSES, net.................... 2,122,908 2,124,594
INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS......... 179,085 85,546
PROPERTY, PLANT AND EQUIPMENT, net................. 1,408,680 31,897
MICROWAVE RELOCATION COSTS, net.................... 135,802 -
OTHER ASSETS, net.................................. 77,383 -
--------------- ---------------
TOTAL ASSETS....................................... $ 4,323,401 $ 2,244,343
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Advances from partners........................... $ 167,818 $ -
Accounts payable................................. 196,146 41,950
Payable to affiliate............................. 5,626 7,598
Accrued expenses................................. 81,230 1,700
Current maturities of long-term debt............. 49 -
--------------- ---------------
Total current liabilities...................... 450,869 51,248
LONG-TERM COMPENSATION OBLIGATION.................. 11,356 1,856
CONSTRUCTION OBLIGATIONS........................... 714,934 -
LONG-TERM DEBT..................................... 686,192 -
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNER INTEREST IN CONSOLIDATED
SUBSIDIARY....................................... 13,397 13,170
PARTNERS' CAPITAL AND ACCUMULATED DEFICIT:
Partners' capital................................ 3,003,484 2,291,806
Deficit accumulated during the development stage. (556,831) (113,737)
--------------- ---------------
Total partners' capital........................ 2,446,653 2,178,069
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............ $ 4,323,401 $ 2,244,343
=============== ===============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM PERIOD FROM
OCTOBER 24, 1994 OCTOBER 24, 1994
YEAR ENDED YEAR ENDED (DATE OF INCEPTION) (DATE OF INCEPTION)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31, TO DECEMBER 31,
1996 1995 1994 1996
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Service.......................... $ 33 $ - $ - $ 33
Equipment........................ 4,142 - - 4,142
--------------- --------------- ---------------- ----------------
Total operating revenues....... 4,175 - - 4,175
OPERATING EXPENSES:
Cost of service.................. 21,928 - - 21,928
Cost of equipment................ 14,148 - - 14,148
Selling.......................... 38,345 145 - 38,490
General and administrative....... 274,352 66,195 3,294 343,841
Depreciation and amortization.... 11,275 211 38 11,524
--------------- --------------- ---------------- ----------------
Total operating expenses....... 360,048 66,551 3,332 429,931
--------------- --------------- ---------------- ----------------
LOSS FROM OPERATIONS............... (355,873) (66,551) (3,332) (425,756)
OTHER INCOME (EXPENSE):
Interest income.................. 8,593 460 24 9,077
Interest expense, net............ (323) - - (323)
Other income..................... 1,586 38 - 1,624
Equity in loss of
unconsolidated partnership...... (96,850) (46,206) - (143,056)
Limited partner interest in net
loss of consolidated subsidiary. (227) 1,830 - 1,603
--------------- --------------- ---------------- ----------------
Total other income (expense)... (87,221) (43,878) 24 (131,075)
--------------- --------------- ---------------- ----------------
NET LOSS........................... $ (443,094) $ (110,429) $ (3,308) $ (556,831)
=============== =============== ================ ================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARTNERS' ACCUMULATED
CAPITAL DEFICIT TOTAL
------------ -------------- ------------
<S> <C> <C> <C>
BALANCE, October 24, 1994 $ - $ - $ -
Contributions of capital 123,438 - 123,438
Net loss - (3,308) (3,308)
------------ -------------- ------------
BALANCE, December 31, 1994 123,438 (3,308) 120,130
Contributions of capital 2,168,368 - 2,168,368
Net loss - (110,429) (110,429)
------------ -------------- ------------
BALANCE, December 31, 1995 2,291,806 (113,737) 2,178,069
Contributions of capital 711,678 - 711,678
Net loss - (443,094) (443,094)
------------ -------------- ------------
BALANCE, December 31, 1996 $ 3,003,484 $ (556,831) $ 2,446,653
============ ============== ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD CUMULATIVE PERIOD
FROM OCTOBER 24, FROM OCTOBER 24,
1994 (DATE OF 1994 (DATE OF
YEAR ENDED DECEMBER 31, INCEPTION) TO INCEPTION) TO
------------------------------------------ DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $ (443,094) $ (110,429) $ (3,308) $ (556,831)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Equity in loss of unconsolidated
partnership................................ 96,850 46,206 - 143,056
Limited partner interest in net loss of
consolidated subsidiary.................... 227 (1,830) - (1,603)
Depreciation and amortization............... 11,275 211 38 11,524
Amortization of debt discount and
issuance costs............................. 14,008 - - 14,008
Loss on disposal of non-network equipment... - 31 - 31
Changes in assets and liabilities:
Receivables............................... (15,871) (340) - (16,211)
Inventory................................. (72,414) - - (72,414)
Prepaid expenses and other assets......... (21,608) (178) (10) (21,796)
Accounts payable and accrued expenses..... 231,754 47,503 3,745 283,002
Long-term compensation obligation......... 9,500 1,856 - 11,356
---------------- --------------- ---------------- -------------------
Net cash provided by (used in)
operating activities................ (189,373) (16,970) 465 (205,878)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................ (683,886) (31,763) (451) (716,100)
Proceeds on sale of equipment............... - 37 - 37
Microwave relocation costs.................. (123,354) - - (123,354)
Purchase of PCS licenses.................... - (2,006,156) (118,438) (2,124,594)
Investment in unconsolidated partnerships... (190,390) (131,752) - (322,142)
Loan to unconsolidated partnership.......... (231,964) (655) - (232,619)
Payment received on loan to unconsolidated
partnership............................... 5,950 - - 5,950
---------------- --------------- ---------------- -------------------
Net cash used in investing activities... (1,223,644) (2,170,289) (118,889) (3,512,822)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from partners...................... 167,818 - - 167,818
Proceeds from issuance of long-term debt.... 674,201 - - 674,201
Payments on long-term debt.................. (24) - - (24)
Debt issuance costs......................... (71,791) - - (71,791)
Partner capital contributions............... 711,678 2,183,368 123,438 3,018,484
---------------- --------------- ---------------- -------------------
Net cash provided by financing
activities............................ 1,481,882 2,183,368 123,438 3,788,688
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................ 68,865 (3,891) 5,014 69,988
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD...................................... 1,123 5,014 - -
---------------- --------------- ---------------- -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD...... $ 69,988 $ 1,123 $ 5,014 $ 69,988
================ =============== ================ ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
. Interest paid, net of amount
capitalized................................ $ 323 $ - $ - $ 323
NON-CASH INVESTING ACTIVITIES:
. Capital expenditures and microwave
relocation costs of $807,241 for the year
ended December 31, 1996 are net of
construction obligations of $714,934.
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Sprint Spectrum Holding Company, L.P. (the "Company" and "Holdings") is a
limited partnership formed in Delaware on March 28, 1995, by Sprint Enterprises,
L.P., TCI Spectrum Holdings, Inc. (formerly known as TCI Telephony Services,
Inc. as successor to TCI Network Services), Cox Telephony Partnership and
Comcast Telephony Services (together the "Partners"). Holdings was formed
pursuant to a reorganization of the operations of an existing partnership,
WirelessCo, L.P. ("WirelessCo") which transferred certain operating functions to
Holdings. The Partners are subsidiaries of Sprint Corporation ("Sprint"), Tele-
Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") and Cox
Communications, Inc. ("Cox", and together with Sprint, TCI and Comcast, the
"Parents"), respectively. The Company and certain other affiliated partnerships
offer services as Sprint PCS.
The Partners of the Company have the following ownership interests as of
December 31, 1996 and 1995:
Sprint Enterprises, L.P. 40%
TCI Spectrum Holdings, Inc. 30%
Cox Telephony Partnership 15%
Comcast Telephony Services 15%
Each Partner's ownership interest consists of a 99% general partner interest and
a 1% limited partnership interest.
The Company is consolidated with certain subsidiaries, including NewTelco, L.P.
and Sprint Spectrum L.P. which, in turn, has several subsidiaries. Sprint
Spectrum L.P.'s subsidiaries are Sprint Spectrum Equipment Company, L.P.
("EquipmentCo"), Sprint Spectrum Realty Company, L.P. ("RealtyCo"), Sprint
Spectrum Finance Corporation ("FinCo"), and WirelessCo. MinorCo, L.P.
("MinorCo") held the remaining ownership interests in NewTelco, L.P., Sprint
Spectrum L.P., EquipmentCo, RealtyCo and WirelessCo at December 31, 1996.
RealtyCo and EquipmentCo were organized on May 15, 1996 for the purpose of
holding PCS network-related real estate interests and assets. FinCo was formed
on May 20, 1996 to be a co-obligor of the debt obligations discussed in Note 5.
VENTURE FORMATION AND AFFILIATED PARTNERSHIPS - A Joint Venture Formation
Agreement ( the "Formation Agreement"), dated as of October 24, 1994, and
subsequently amended as of March 28, 1995, and January 31, 1996, was entered
into by the Parents, pursuant to which the Parents agreed to form certain
entities to (i) provide national wireless telecommunications services, including
acquisition and development of personal communications service ("PCS") licenses,
(ii) develop a PCS wireless system in the Los Angeles-San Diego Major Trading
Area ("MTA") and (iii) take certain other actions.
On October 24, 1994, WirelessCo was formed and on March 28, 1995, additional
partnerships were formed consisting of Holdings, MinorCo, NewTelco, L.P., and
6
<PAGE>
Sprint Spectrum L.P. The Partners' ownership interests in WirelessCo were
initially held directly by the Partners as of October 24, 1994, the formation
date of WirelessCo, but were subsequently contributed to Holdings and then to
Sprint Spectrum L.P. on March 28, 1995.
Prior to July 1, 1996, substantially all wireless operations of Sprint Spectrum
L.P. and subsidiaries were conducted at Holdings and substantially all operating
assets and liabilities, with the exception of the interest in an unconsolidated
subsidiary and the ownership interest in PCS licenses, were held at Holdings.
As of July 1, 1996, Holdings transferred these net assets, and assigned
agreements related to the wireless operations to which it was a party to Sprint
Spectrum L.P., EquipmentCo and RealtyCo.
SPRINT SPECTRUM HOLDING COMPANY, L.P. (FORMERLY KNOWN AS MAJORCO, L.P.)
PARTNERSHIP AGREEMENT - The Amended and Restated Agreement of Limited
Partnership of MajorCo, L.P. (the "MajorCo Agreement"), dated as of January 31,
1996, among Sprint Enterprises, L.P., TCI Spectrum Holdings, Inc., Comcast
Telephony Services and Cox Telephony Partnership provides that the purpose of
the Company is to engage in wireless communications services. The MajorCo
Agreement provides for the governance and administration of partnership
business, allocation of profits and losses (including provisions for special and
curative allocations), tax allocations, transactions with partners, disposition
of partnership interests and other matters.
The MajorCo Agreement generally provides for the allocation of profits and
losses according to each Partner's proportionate percentage interest, after
giving effect to special allocations. After special allocations, profits are
allocated to partners to the extent of and in proportion to cumulative net
losses previously allocated. Losses are allocated, after considering special
allocations, according to each Partner's allocation of net profits previously
allocated.
The MajorCo Agreement provides for a planned capital amount to be contributed by
the Partners ("Total Mandatory Contributions"), which represents the sum of $4.2
billion, which includes agreed upon values attributable to the contributions of
certain additional PCS licenses by a Partner. The Total Mandatory Contributions
amount is required to be contributed in accordance with capital contribution
schedules to be set forth in approved annual budgets. The partnership board of
Holdings may request capital contributions to be made in the absence of an
approved budget or more quickly than provided for in an approved budget, but
always subject to the Total Mandatory Contributions limit. The proposed budget
for fiscal 1997 has not yet been approved by the parternship board. An
additional Amended and Restated Capital Contribution Agreement (the "Amended
Agreement") was executed effective October 2, 1996. The Amended Agreement
recognizes that through December 31, 1995, approximately $2.2 billion of the
Total Mandatory Contributions had been contributed to Sprint Spectrum L.P., and
designates that an additional $1.0 billion of the remaining commitment shall be
contributed to Sprint Spectrum L.P.
At December 31, 1996, approximately $3.0 billion of the Total Mandatory
Contributions had been contributed by the Partners to Holdings and its
affiliated partnerships, of which $2.6 billion had been contributed to Sprint
Spectrum L.P.
PARENT UNDERTAKING - Each Parent has entered into an agreement which provides
for certain undertakings by each Parent in favor of other Partners and which
7
<PAGE>
addresses certain obligations of the Parent pertaining to items including
provision of services, confidentiality, foreign ownership, purchasing,
restrictions on disposition and certain other matters.
DEVELOPMENT STAGE ENTERPRISES - The Company and its subsidiaries are development
stage enterprises. The success of the Company's development is dependent on a
number of business factors, including securing financing to complete network
construction and fund initial operations, successfully deploying the PCS network
and attaining profitable levels of market demand for Company products and
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements have been prepared
from the date of inception, October 24, 1994, for WirelessCo, and from the dates
of inception, for other consolidated subsidiaries, through December 31, 1996.
The assets, liabilities, results of operations and cash flows of entities in
which the Company has a controlling interest have been consolidated. All
significant intercompany accounts and transactions have been eliminated.
MinorCo, the limited partner, has been allocated approximately $227,000 in
income and $1,830,000 of losses incurred by NewTelco, L.P. for the years ended
December 31, 1996 and 1995, respectively, as losses in excess of the general
partner's capital account (which consisted of $1,000) are to be allocated to the
limited partner to the extent of its capital account.
TRADEMARK AGREEMENT - Sprint(R) is a registered trademark of Sprint
Communications Company, L.P. and is licensed to the Company on a royalty-free
basis pursuant to a trademark license agreement between the Company and Sprint.
REVENUE RECOGNITION - Operating revenues for PCS services are recognized as
service is rendered. Operating revenues for equipment sales are recognized at
the time the equipment is sold to a customer or an unaffiliated agent.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents. Under
the Company's cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes and are included
in Accounts payable in the consolidated balance sheets.
ACCOUNTS RECEIVABLE - Accounts receivable are net of an allowance for doubtful
accounts of approximately $202,000 at December 31, 1996. No allowance was
recorded for the year ended December 31, 1995.
INVENTORY - Inventory consists of wireless communication equipment (primarily
handsets). Inventory is stated at lower of cost or replacement cost. Gains and
losses on the sales of handsets are recognized at the time of sale.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Construction work in progress represents costs incurred to design and
construct the PCS network. Repair and maintenance costs are charged to expense
as incurred. When network equipment is retired, or otherwise disposed of, its
book value, net of salvage, is charged to accumulated depreciation. When non-
network equipment is sold, retired or abandoned, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is recognized.
8
<PAGE>
Property, plant and equipment are depreciated using the straight-line method
based on estimated useful lives of the assets. Depreciable lives range from 3
to 20 years.
INVESTMENT IN PCS LICENSES AND OTHER INTANGIBLES -During 1994 and 1995, the
Federal Communications Commission ("FCC") auctioned PCS licenses in specific
geographic service areas. The FCC grants licenses for terms of up to ten years,
and generally grants renewals if the licensee has complied with its license
obligations. The Company believes it has and will continue to meet all
requirements necessary to secure renewal of its PCS licenses. The Company has
also incurred costs associated with microwave relocation in the construction of
the PCS network. Amortization of PCS licenses and microwave relocation costs
will commence as each service area becomes operational, over estimated useful
lives of 40 years. Amortization expense of $1,711,000 is included in
Depreciation and amortization expense in the consolidated statement of
operations for the year ended December 31, 1996. No amortization expense was
recorded in 1995 or 1994. Interest expense capitalized pertaining to the
acquisition of the PCS licenses has been included in Property, plant and
equipment.
The ongoing value and remaining useful life of intangible assets are subject to
periodic evaluation. The Company currently expects the carrying amounts to be
fully recoverable. Impairments of intangibles and long-lived assets are
assessed based on an undiscounted cash flow methodology.
CAPITALIZED INTEREST - Interest costs associated with the construction of
capital assets incurred during the period of construction are capitalized. The
total capitalized in 1996 was approximately $30,461,000. There were no amounts
capitalized in 1995 or 1994.
DEBT ISSUANCE COSTS - Included in Other assets are costs associated with
obtaining financing. Such costs are capitalized and amortized to interest
expense over the term of the related debt instruments using the effective
interest method. Amortization expense for the year ended December 31, 1996 was
approximately $1,944,000.
MAJOR CUSTOMER - The Company markets its products through multiple distribution
channels, including Company-owned retail stores and third-party retail outlets.
Sales to one third-party retail customer exceeded 10% of Equipment revenue in
the consolidated statement of operations for the year ended December 31, 1996.
INCOME TAXES - The Company has not provided for federal or state income taxes
since such taxes are the responsibility of the individual Partners.
FINANCIAL INSTRUMENTS - The carrying value of the Company's short-term financial
instruments, including cash and cash equivalents, receivables from customers and
affiliates and accounts payable approximates fair value. The fair value of the
Company's long-term debt is based on quoted market prices for the same issues or
current rates offered to the Company for similar debt. A summary of the fair
value of the Company's long-term debt at December 31, 1996 is included in Note
5.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
9
<PAGE>
RECLASSIFICATIONS - Certain reclassifications have been made to the 1995 and
1994 financial statements to conform to the 1996 financial statement
presentation.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------ ---------
<S> <C> <C>
Land...................................... $ 905 $ -
Buildings and leasehold improvements...... 86,467 -
Office furniture and fixtures............. 68,210 2,902
Network equipment......................... 255,691 -
Telecommunications plant - construction
work in progress......................... 1,006,990 29,200
------------ ---------
1,418,263 32,102
Less accumulated depreciation............. (9,583) (205)
------------ ---------
$ 1,408,680 $ 31,897
============ =========
</TABLE>
4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS
AMERICAN PCS, L.P. - On January 9, 1995, WirelessCo acquired a 49% limited
partnership interest in American PCS, L.P. ("APC"). American Personal
Communications II, L.P. ("APC II") holds a 51% partnership interest in APC and
is the general managing partner. The investment in APC is accounted for under
the equity method. Concurrently with the execution of the partnership agreement,
the Company entered into an affiliation agreement with APC which provides for
the reimbursement of certain allocable costs and payment of affiliate fees.
Effective August 31, 1996, WirelessCo's interest in APC, the existing loans to
APC, and obligations to provide additional funding to APC were transferred to
Holdings pursuant to an amendment to the partnership agreement. Summarized
financial information is as follows (in thousands):
<TABLE>
<CAPTION>
December December
31, 1996 31, 1995
----------------------
<S> <C> <C>
Total assets........... $331,556 $237,326
Total liabilities...... 450,690 171,180
Total revenues......... 71,838 5,153
Net loss............... 202,626 51,551
</TABLE>
The partnership agreement between the Company and APC II specifies that losses
are allocated based on percentage ownership interests and certain other factors.
In January 1997, the Company and APC II amended the APC partnership agreement
with respect to the allocation of profits and losses. For financial reporting
purposes, profits and losses are to be allocated in proportion to Holdings' and
10
<PAGE>
APC II's respective partnership interests, except for costs related to stock
appreciation rights and interest expense attributable to the FCC interest
payments which shall be allocated entirely to APC II.
Holding's investment in APC was approximately $75,546,000 at December 31, 1995.
Holdings share of the losses of APC for the year ended December 31, 1996,
totaling approximately $96,850,000, has exceeded its investment balance by
approximately $20,554,000.
The unamortized excess of the Company's investment over its equity in the
underlying net assets of APC at the date of acquisition was approximately
$10,139,000. This excess investment has been eliminated as a result of the
recognition of Holding's equity in APC's losses. Amortization included in equity
in loss of unconsolidated partnership prior to such elimination totaled
approximately $128,000 and $240,000 for the years ended December 31, 1996 and
1995, respectively.
The call option in APC acquired on January 9, 1995, provides the Company with
the right to purchase an additional interest in APC from APC II in annual
increments beginning five years after the initial PCS network build-out is
completed. The first increment, an additional 20% of the APC II ownership
interest, can be acquired in each of the fifth through seventh years with the
remaining interest available for purchase in the eighth through tenth year. APC
II also has the right to put a portion of its ownership interest to the Company
on an annual basis beginning after the completion of the initial PCS network
build-out, through the fifth anniversary date the greater of (i) one-fifth of
APC II's initial percentage interest of 51% in APC or (ii) the portion of APC
II's interest equal to APC II's obligation for
annual FCC payments to be made by APC. The exercise price of the call and put
options are based on the Fair Value, as defined, of APC at the date of exercise.
The amount recorded at December 31, 1996 and 1995 for such option, net of
accumulated amortization, was $9,250,000 and $10,000,000, respectively. As of
December 31, 1996, APC II has not exercised any put options. The Company is
committed to arrange or provide certain funding for procurement of APC's CDMA
network. APC is under a contractual obligation to repay any amounts provided by
the Company, plus interest.
During the initial five year build-out period, which began in December 1994, APC
II and the Company are obligated as follows: (a) APC II is obligated to make
capital contributions in an amount equal to the aggregate principal and interest
payments to the FCC, provided APC II has sufficient cash flows or can obtain
financing from a third party; (b) if APC II is unable to meet such obligation,
the Company is required to contribute the shortfall, upon ten days prior notice.
Under certain circumstances, APC II has the right and is obligated to exercise
its put right to the extent necessary to fund additional capital contributions;
(c) the Company is required to contribute to APC cash necessary for operations
up to an amount of approximately $98 million; and (d) the Company is obligated
to fund the cash requirements of APC in excess of that described in (a), (b),
and (c) above, in the form of either loans or additional capital up to $275
million. As of December 31, 1996, $98 million of equity had been contributed
and approximately $232 million of partner advances had been extended, fulfilling
the Company's obligations under (c) and (d) above. In January 1997, additional
advances of $20 million were extended. All advances were repaid in full in
February 1997 and no further obligation for (c) and (d) above exists.
COX COMMUNICATIONS PCS, L.P. - On December 31, 1996, the Company acquired a 49%
limited partner interest in Cox Communications PCS, L.P. ("Cox PCS"). Cox
Pioneer Partnership ("CPP") holds a 50.5% general and a 0.5% limited partner
interest and is the general and managing partner. The investment in Cox PCS is
accounted for under the equity method. As of December 31, 1996, approximately
11
<PAGE>
$168 million in equity, including $2.45 million to PCS Leasing Co, L.P.
("LeasingCo"), a wholly owned subsidiary of Cox PCS, had been contributed to Cox
PCS by the Company. The excess of the Company's investment over its equity in
the underlying net assets on December 31, 1996 was approximately $32.7 million.
A portion of the initial contribution totaling approximately $23 million was
payable at December 31, 1996.
Under the terms of the partnership agreement, CPP and the Company are obligated
as follows: (a) if the FCC consents to the assumption and recognition of the
license payment obligations by Cox PCS, CPP is obligated to make capital
contributions in an amount equal to such liability and related interest; (b) if
the FCC does not consent, Cox PCS is obligated to reimburse Cox Communications,
Inc. for interest payments exceeding the amount that would have been payable by
Cox Communications, Inc. to the FCC had the interest rate been 5.875% through
the date that Cox Communications, Inc. completes refinancing of the FCC
liability; (c) the Company is obligated to make capital contributions of
approximately $369,908,000 to Cox PCS; (d) the Company is not obligated to make
any cash capital contributions upon the assumption by Cox PCS of the FCC payment
obligations until CPP has contributed cash in an amount equal to the aggregate
principal and interest of such obligations; and, (e) CPP and the Company are
obligated to make additional capital contributions in an amount equal to such
partner's percentage interest times the amount of additional capital
contributions being requested. Additionally, the Company acquired a 49% limited
partner interest in LeasingCo. LeasingCo is a limited partnership formed to
acquire, construct or otherwise develop equipment and other personal property to
be leased to Cox PCS. The Company is not obligated to make additional capital
contributions beyond the initial funding of approximately $2,450,000.
Concurrently with the execution of the partnership agreement, the Company
entered into an affiliation agreement with Cox PCS which provides for the
reimbursement of certain allocable costs and payment of affiliate fees. For the
year ended December 31, 1996, allocable costs of approximately $7,339,000 are
netted against the related operating expense captions in the accompanying
consolidated statement of operations and in receivables from affiliates in the
consolidated balance sheet. In addition, the Company purchases certain
equipment, such as handsets, on behalf of Cox PCS. Receivables from affiliates
for handsets and related equipment were approximately $6 million at December 31,
1996.
5. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consists of the following at of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
11% Senior Notes due in 2006 $ 250,000
12 1/2% Senior Discount Notes due in 2006, net of
unamortized discount of $214,501 285,499
Credit facility - term loan 150,000
Other 742
----------
Total debt 686,241
Less current maturities 49
----------
Long-term debt $ 686,192
==========
</TABLE>
12
<PAGE>
SENIOR NOTES AND SENIOR DISCOUNT NOTES - In August 1996, Sprint Spectrum L.P.
and Sprint Spectrum Finance Corporation (together, the "Issuers") issued $250
million aggregate principal amount of 11% Senior Notes due 2006 ("the Senior
Notes"), and $500 million aggregate principal amount at maturity of 12 1/2%
Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together with
the Senior Notes, the "Notes"). The Senior Discount Notes were issued at a
discount to their aggregate principal amount at maturity and generated proceeds
of approximately $273 million. Cash interest on the Senior Notes will accrue at
a rate of 11% per annum and is payable semi-annually in arrears on each February
15 and August 15, commencing February 15, 1997. Cash interest will not accrue or
be payable on the Senior Discount Notes prior to August 15, 2001. Thereafter,
cash interest on the Senior Discount Notes will accrue at a rate of 12 1/2% per
annum and will be payable semi-annually in arrears on each February 15 and
August 15, commencing February 15, 2002.
On August 15, 2001, the Issuers will be required to redeem an amount equal to
$384.772 per $1,000 principal amount at maturity of each Senior Discount Note
then outstanding ($192 million in aggregate principal amount at maturity,
assuming all of the Senior Discount Notes remain outstanding at such date).
The Notes are redeemable at the option of the Issuers, in whole or in part, at
any time on or after August 15, 2001 at the redemption prices set forth below,
respectively, plus accrued and unpaid interest, if any, to the redemption date,
if redeemed during the 12 month period beginning on August 15 of the years
indicated below:
<TABLE>
<CAPTION>
SENIOR DISCOUNT
SENIOR NOTES NOTES
REDEMPTION REDEMPTION
YEAR PRICE PRICE
- ------ ------------------------------
<S> <C> <C>
2001 105.500% 110.000%
2002 103.667% 106.500%
2003 101.833% 103.250%
2004 and thereafter 100.000% 100.000%
</TABLE>
In addition, prior to August 15, 1999, the Issuers may redeem up to 35% of the
originally issued principal amount of the Notes. The redemption price of the
Senior Notes is equal to 111.0% of the principal amount of the Senior Notes so
redeemed, plus accrued and unpaid interest, if any, to the redemption date with
the net proceeds of one or more public equity offerings, provided that at least
65% of the originally issued principal amount of Senior Notes would remain
outstanding immediately after giving effect to such redemption. The redemption
price of the Senior Discount Notes is equal to 112.5% of the accreted value at
the redemption date of the Senior Discount Notes so redeemed, with the net
proceeds of one or more public equity offerings, provided that at least 65% of
the originally issued principal amount at maturity of the Senior Discount Notes
would remain outstanding immediately after giving effect to such redemption.
The Notes contain certain restrictive covenants, including (among other
requirements) limitations on additional indebtedness, limitations on restricted
payments, limitations on liens, and limitations on dividends and other payment
restrictions affecting certain restricted subsidiaries.
13
<PAGE>
BANK CREDIT FACILITY - Sprint Spectrum L.P. (the "Borrower") entered into an
agreement with The Chase Manhattan Bank ("Chase") as administrative agent for a
group of lenders for a $2 billion bank credit facility dated October 2, 1996.
The proceeds of this facility are to be used to finance working capital needs,
subscriber acquisition costs, capital expenditures and other general Borrower
purposes.
The facility consists of a revolving credit commitment of $1.7 billion and a
$300 million term loan commitment, $150 million of which was drawn down
subsequent to closing and $150 million of which was to be drawn within 90 days
after closing. The amount available under the revolving credit facility was $450
million on December 31, 1996. There were no borrowings under the revolving
credit facility as of December 31, 1996. The availability will be increased upon
the achievement of certain financial and operating conditions as defined in the
agreement. Commitment fees for the revolving portion of the agreement are
payable quarterly based on average unused revolving commitments.
The revolving credit commitment expires July 13, 2005. Availability will be
reduced in quarterly installments ranging from $75 million to $175 million
commencing January 2002. Further reductions may be required after January 1,
2000, to the extent that the Borrower meets certain financial conditions.
Subsequent to December 31, 1996, the Borrower drew down $200 million under the
revolving credit facility.
The term loans are due in sixteen consecutive quarterly installments beginning
January 2002 in aggregate principal amounts of $125,000 for each of the first
fifteen payments with the remaining aggregate outstanding principal amount of
the term loans due as the last installment.
Interest on the term loans and/or the revolving credit loans is at the
applicable LIBOR rate plus 2.5% ("Eurodollar Loans"), or the greater of the
prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5% ("ABR
Loans"), at the Company's option. The interest rate may be adjusted downward for
improvements in the bond rating and/or leverage ratios. Interest on ABR Loans
and Eurodollar Loans with interest period terms in excess of 3 months is payable
quarterly. Interest on Eurodollar Loans with interest period terms of less than
3 months is payable on the last day of the interest period. As of December 31,
1996, the interest rate on the first $150 million term loan was 8.19%.
Borrowings under the Bank Credit Facility are secured by the Company's interests
in WirelessCo, RealtyCo and EquipmentCo and certain other personal and real
property (the "Shared Lien"). The Shared Lien equally and ratably secures the
Bank Credit Facility, the Vendor Financing (Note 6) and certain other
indebtedness of the Company. The credit facility is jointly and severally
guaranteed by WirelessCo, RealtyCo and EquipmentCo and is non-recourse to the
Parents and the Partners.
The Bank Credit Facility agreement and Vendor Financing agreements (Note 6)
contain certain restrictive financial and operating covenants, including (among
other requirements) maximum debt ratios (including debt to total
capitalization), limitations on capital expenditures, limitations on additional
indebtedness and limitations on dividends and other payment restrictions
affecting certain restricted subsidiaries. The loss of the right to use the
Sprint trademark, the termination or non-renewal of any FCC license that reduces
population coverage below specified limits, or changes in controlling interest
in the Company, as defined, among other provisions, constitute events of
default.
14
<PAGE>
The estimated fair value of the Company's long-term debt at December 31, 1996 is
as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair
Value
---------- -----------
<S> <C> <C>
11% Senior Notes $ 250,000 $ 270,625
12 1/2% Senior Discount Notes 285,499 337,950
Credit facility - term loan 150,000 151,343
</TABLE>
At December 31, 1996, scheduled maturities of long-term debt during each of the
next five years are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 49
1998 54
1999 60
2000 66
2001 192,459
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - Minimum rental commitments as of December 31, 1996, for all
noncancelable operating leases, consisting principally of leases for cell and
switch sites and office space, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 68,616
1998 61,186
1999 57,407
2000 38,356
2001 13,468
</TABLE>
Gross rental expense for cell and switch sites aggregated approximately
$13,097,000 for the year ended December 31, 1996. Gross rental expense for
office space approximated $11,432,000, $687,000 and $105,000 for the years ended
December 31, 1996 and 1995, and the period from October 24, 1994 (date of
inception) through December 31, 1994, respectively. Certain leases contain
renewal options that may be exercised from time to time and are excluded from
the above amounts.
PROCUREMENT CONTRACTS - On January 31, 1996, the Company entered into
procurement and services contracts with AT&T Corp. (subsequently assigned to
Lucent Technologies, Inc., "Lucent") and Northern Telecom, Inc. ("Nortel" and
together with Lucent, the "Vendors") for the engineering and construction of a
PCS network. Each contract provides for an initial term of ten years with
renewals for additional one-year periods. The Vendors must achieve substantial
completion of the PCS network within an established time frame and in accordance
with criteria specified in the procurement contracts. Pricing for the initial
equipment, software and engineering services has been established in the
procurement contracts. The procurement contracts provide for payment terms
based on delivery dates, substantial completion dates, and final acceptance
dates. In the event of delay in the completion of the PCS network, the
procurement contracts provide for certain amounts
15
<PAGE>
to be paid to the Company by the Vendors. The minimum commitments for the
initial term are $0.8 billion and $1.0 billion from Lucent and Nortel,
respectively, which include, but are not limited to, all equipment required for
the establishment and installation of the PCS network.
HANDSET PURCHASE AGREEMENTS - In June, 1996, the Company entered into a three-
year purchase and supply agreement with a vendor for the purchase of handsets
and other equipment totaling approximately $500 million. During 1996, the
Company purchased $85 million under the agreement. The total purchase
commitment must be satisfied by April 30, 1998.
In September, 1996, the Company entered into a second three-year purchase and
supply agreement for the purchase of handsets and other equipment totaling more
than $600 million. Purchases under the second agreement will commence on or
after April 1, 1997, and the total purchase commitment must be satisfied during
the three-year period after the initial handset purchase.
VENDOR FINANCING - As of October 2, 1996, the Company entered into financing
agreements with Nortel and Lucent for multiple drawdown term loan facilities
totaling $1.3 billion and $1.8 billion, respectively. The proceeds of such
facilities are to be used to finance the purchase of goods and services provided
by the Vendors.
Nortel has committed to provide financing in two phases. During the first phase,
Nortel will finance up to $800 million. Once the full $800 million has been
utilized and the Company obtains additional equity commitments and/or
subordinated unsecured loans of at least $400 million and achieves certain
operating conditions, Nortel will finance up to an additional $500 million. The
amount available under the Nortel facility was $1.3 billion on December 31,
1996. In addition, the Company will be obligated to pay origination fees on the
date of the initial draw down loan under the first and second phases. The Nortel
agreement terminates on the earliest of (a) the date the availability under the
commitments is reduced to zero, (b) December 31, 2000, or (c) March 31, 1997 if
no borrowings under the agreements have been drawn.
Lucent has committed to financing up to $1.5 billion through December 31, 1997,
and up to an aggregate of $1.8 billion thereafter. The Company pays a facility
fee on the daily amount of loans outstanding under the agreement, payable
quarterly. The Lucent agreement terminates June 30, 2001. Subsequent to
December 31, 1996, the Company borrowed approximately $274 million under the
Lucent facility.
Certain amounts included under Construction Obligations on the consolidated
balance sheet may be financed under the Vendor Financing agreements.
The principal amounts of the loans drawn under both the Nortel and Lucent
agreements are due in twenty consecutive quarterly installments, commencing on
the date which is thirty-nine months after the last day of such "Borrowing Year"
(defined in the agreements as any one of the five consecutive 12-month periods
following the date of the initial drawdown of the loan). The aggregate amount
due each year is equal to percentages ranging from 10% to 30% multiplied by the
total principal amount of loans during each Borrowing Year.
The agreements provide two borrowing rate options. During the first phase of
the Nortel agreement and throughout the term of the Lucent agreement "ABR Loans"
16
<PAGE>
bear interest at the greater of the prime rate or 0.5% plus the Federal Funds
effective rate, plus 2%. "Eurodollar Loans" bear interest at the London
interbank (LIBOR) rate (any one of the 30-, 60- or 90-day rates, at the
discretion of the Company), plus 3%. During the second phase of the Nortel
agreement, ABR Loans bear interest at the greater of the prime rate or 0.5% plus
the Federal Funds effective rate, plus 1.5%; and Eurodollar loans bear interest
at the LIBOR rate plus 2.5%. Interest from the date of each loan through one
year after the last day of the Borrowing Year is added to the principal amount
of each loan. Thereafter, interest is payable quarterly.
Borrowings under the Vendor Financing are secured by the Shared Lien (Note 5).
The Vendor Financing is jointly and severally guaranteed by WirelessCo, RealtyCo
and EquipmentCo and is non-recourse to the Parents and the Partners.
SERVICE AGREEMENT - The Company has entered into an agreement with a vendor to
provide PCS call record and retention services. Monthly rates per subscriber are
variable based on overall subscriber volume. If subscriber fees are less than
specified annual minimum charges, the Company will be obligated to pay the
difference between the amounts paid for processing fees and the annual minimum.
Annual minimums range from $20 million to $60 million through 2001.
The agreement extends through December 31, 2001, with two automatic, two-year
renewal periods, unless terminated by the Company. The company may terminate
the agreement prior to the expiration date, but would be subject to specified
termination penalties.
8. EMPLOYEE BENEFITS
Employees performing services for the Company were employed by Sprint
Corporation through December 31, 1995. Amounts paid to Sprint Corporation
relating to pension expense and employer contributions to the Sprint Corporation
401(k) plan for these employees approximated $323,000 in 1995. No expense was
incurred through December 31, 1994.
The Company maintains short-term and long-term incentive plans. All salaried
employees are eligible for the short-term incentive plan commencing at date of
hire. Short-term incentive compensation is based on incentive targets
established for each position based on the Company's overall compensation
strategy. Targets contain both an objective Company component and a personal
objective component. Charges to operations for the short-term plan approximated
$12,332,000 and $3,491,000 for the years ended December 31, 1996 and 1995,
respectively. No expense was incurred through December 31, 1994.
LONG-TERM COMPENSATION OBLIGATION - Effective July 1, 1996, a long-term
compensation plan was adopted. Employees meeting certain eligibility
requirements are considered to be participants in the plan. Participants will
receive 100% of the pre-established targets for the period from July 1, 1995 to
June 30, 1996 (the "Introductory Term"). Participants may elect a payout of the
amount due or convert 50% or 100% of the award to appreciation units. Unless
converted to appreciation units, payment for the Introductory Term will be made
in the third quarter of 1998. Appreciation units vest 25% per year commencing
on the second anniversary of the date of grant. Participants have until March
15, 1997 to make payout or conversion elections. For the years ended December
31, 1996 and 1995, $9.5 million and $1.9 million, respectively, has been
expensed. The ultimate liability will be based on actual payout vs. conversion
elections and the final results of an independent valuation of the Company as of
17
<PAGE>
bear interest at the June 30, 1997. The Company has applied APB Opinion No. 25,
"Accounting for Stock Issued to Employees" for 1996. No significant difference
would have resulted if SFAS No. 123, "Accounting for Stock-Based Compensation"
had been applied.
SAVINGS PLAN - Effective January, 1996, the Company established a savings and
retirement program (the "Savings Plan") for certain employees, which is
intended to qualify under Section 401(k) of the Internal Revenue Code. Most
permanent full-time, and certain part-time, employees are eligible to become
participants in the plan after one year of service or upon reaching age 35,
whichever occurs first. Participants make contributions to a basic before tax
account and supplemental before tax account. The maximum contribution for any
participant for any year is 16% of such participant's compensation. For each
eligible employee who elects to participate in the Savings Plan and makes a
contribution to the basic before tax account, the Company makes a matching
contribution. The matching contributions equal 50% of the amount of the basic
before tax contribution of each participant up to the first 6% that the employee
elects to contribute. Contributions to the Savings Plan are invested, at the
participants discretion, in several designated investment funds. Distributions
from the Savings Plan generally will be made only upon retirement or other
termination of employment, unless deferred by the participant. Expense under
the Savings Plan approximated $1,125,000 in 1996.
PROFIT SHARING (RETIREMENT) PLAN - Effective January, 1996, the Company
established a profit sharing plan for its employees. Employees are eligible to
participate in the plan after completing one year of service. Profit sharing
contributions are based on the compensation, age, and years of service of the
employee. Profit sharing contributions are deposited into individual accounts of
the Company's 401(k) plan. Vesting occurs once a participant completes five
years of service. For the year ended December 31, 1996, expense under the profit
sharing plan approximated $726,000.
9. RELATED PARTY TRANSACTIONS
BUSINESS SERVICES - The Company reimburses Sprint Corporation for certain
accounting and data processing services, for participation in certain
advertising contracts, for certain cash payments made by Sprint Corporation on
behalf of the Company and other management services. The Company is allocated
the costs of such services based on direct usage. Allocated expenses of
approximately $11,900,000 and $2,646,000 are included in Selling and General and
administrative expense in the consolidated statement of operations for 1996 and
1995, respectively. No reimbursement was made through December 31, 1994.
PAGING SERVICES - In 1996, the Company commenced paging services pursuant to
agreements with Paging Network Equipment Company ("PageNet") and Sprint
Communications Company, L.P. ("Sprint Communications"). For the year ended
December 31, 1996, Sprint Communications received agency fees of approximately
$4.9 million.
ADVANCES FROM PARTNERS - In December 1996, the Partners advanced approximately
$168 million to the Company, which was contributed to Cox PCS (Note 4). The
advances bear interest at the prime rate (8.25% at December 31, 1996) and were
repaid in February 1997.
18
<PAGE>
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
1996 First Second Third Fourth
---- ------ ------ ------- -------
<S> <C> <C> <C> <C>
Operating revenues... $ - $ - $ - $ 4,175
Operating expenses... 30,978 46,897 87,135 195,038
Net loss............. 67,425 90,770 101,497 183,402
1995
----
Operating revenues... $ - $ - $ - $ -
Operating expenses... 3,655 4,589 11,844 46,463
Net loss............. 6,789 9,718 19,488 74,434
</TABLE>
19
<PAGE>
Eshibit 99.3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Teleport Communications Group Inc.:
We have audited the accompanying consolidated balance sheet of Teleport
Communications Group Inc. and its subsidiaries ("TCG") as of December 31, 1996
and the related consolidated statements of operations, changes in stockholders'
equity and partners' capital (deficit), and cash flows for the year then ended
and the combined balance sheet of Teleport Communications Group Inc. and its
subsidiaries and TCG Partners (collectively, "TCGP"), which were under common
ownership and management, as of December 31, 1995 and the related combined
statements of operations, changes in stockholders' equity and partners' capital
(deficit), and cash flows for the years ended December 31, 1995 and 1994. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated (combined) financial position of TCG and TCGP at
December 31, 1996 and 1995, respectively, and the results of their operations
and their cash flows for the three years ended December 31, 1996, 1995 and 1994
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
FEBRUARY 21, 1997 (FEBRUARY 28, 1997 AND MARCH 1, 1997 AS TO NOTE 3)
F-1
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
ASSETS CONSOLIDATED COMBINED
- ------
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 277,540 $ 11,862
---------- ---------
Marketable securities 440,806 -
---------- ---------
Accounts receivable:
Trade - net of allowance for
doubtful accounts
($5,989 in 1996 and $1,161 in 1995) 46,325 26,196
Related parties 4,191 4,640
Miscellaneous - net of allowance for
doubtful accounts
($1,406 in 1996 and $543 in 1995) 6,795 2,037
---------- ---------
Accounts receivable - net 57,311 32,873
---------- ---------
Prepaid expenses 9,531 4,939
---------- ---------
Other current assets 2,373 532
---------- ---------
Total current assets 787,561 50,206
---------- ---------
Fixed assets - at cost:
Communications network 1,211,922 492,858
Other 92,307 52,795
---------- ---------
1,304,229 545,653
Less accumulated depreciation and
amortization (236,967) (113,202)
---------- ---------
Fixed assets - net 1,067,262 432,451
---------- ---------
Investments in and advances to
unconsolidated affiliates 126,561 99,299
---------- ---------
Goodwill - net of accumulated
amortization
($3,789 in 1996 and $1,716 in 1995) 57,764 27,008
---------- ---------
Other assets 10,949 5,829
---------- ---------
Total assets $2,050,097 $ 614,793
========== =========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
BALANCE SHEETS - CONTINUED
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' DEFICIT
- ----------------------------------------------------------
CONSOLIDATED COMBINED
1996 1995
---- ----
Current liabilities:
Accounts payable and accrued
liabilities ($1,079 in 1996
and $295 in 1995 with
related parties) $ 215,808 $ 92,104
Current portion of capital lease
obligations ($21,139 in 1996
and $3,338 in 1995 with
related parties) 24,063 4,354
Other current liabilities 2,365 831
---------- --------
Total current liabilities 242,236 97,289
Capital lease obligations
($28,716 in 1996 and $10,017 in 1995
with related parties) 34,489 11,964
Subordinated debt to parents - 269,000
Long-term bank debt - 87,500
Senior Notes 300,000 -
Senior Discount Notes 659,567 -
Unamortized notes costs (25,761) -
TCI note-subordinated (including
accrued interest of $1,007) 27,007 -
Minority interest - 4,409
Other liabilities 15,689 19,283
---------- --------
Total liabilities 1,253,227 489,445
---------- --------
Commitments and contingencies
Stockholders' equity and partners'
deficit:
Common Stock, Class A $.01 par value:
450,000,000 shares authorized, 28,668,400
shares issued and outstanding at December
31, 1996; and Common Stock, $1.00 par
value: 3,000 shares authorized, 1,667
shares issued and outstanding at
December 31, 1995 287 2
Common Stock, Class B $.01 par value:
300,000,000 shares authorized, 139,250,370
shares issued and outstanding at December
31, 1996; and no shares issued and
outstanding at December 31, 1995 1,393 -
Additional paid-in capital 1,197,252 195,388
Unrealized loss on marketable
securities (25) -
Accumulated deficit (281,012) (65,648)
Partners' deficit - (4,394)
---------- --------
Less cost of Class B Common Stock held
in treasury, 7,975,738 shares at
December 31, 1996 917,895 125,348
---------- --------
(121,025) -
---------- --------
Total stockholders' equity and
partners' deficit 796,870 125,348
Total liabilities and stockholders' ---------- --------
equity and partners' deficit $2,050,097 $614,793
========== ========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED COMBINED
1996 1995 1994
---- ---- ----
Revenues:
<S> <C> <C> <C>
Telecommunications services $ 244,864 $ 134,652 $ 99,983
Management and royalty fees from
affiliates 22,805 31,517 20,691
------------ ----------- -----------
Total revenues 267,669 166,169 120,674
------------ ----------- -----------
Expenses:
Operating 157,591 93,118 76,572
Selling, general and administrative 85,025 50,475 39,989
Depreciation and amortization 78,416 37,837 19,933
------------ ----------- -----------
Total expenses 321,032 181,430 136,494
------------ ----------- -----------
Operating loss (53,363) (15,261) (15,820)
------------ ----------- -----------
Interest:
Interest income 30,219 4,067 1,711
Interest expense ($14,997 in 1996,
$18,763 in 1995 and $4,998 in 1994
with related parties) (73,633) (23,331) (5,079)
------------ ----------- -----------
Total interest (43,414) (19,264) (3,368)
------------ ----------- -----------
Loss before minority interest, equity
in losses of unconsolidated affiliates
and income tax provision (96,777) (34,525) (19,188)
Minority interest 3,520 663 1,395
Equity in losses of unconsolidated
affiliates (19,400) (19,541) (11,763)
------------ ----------- -----------
Loss before income tax provision (112,657) (53,403) (29,556)
Income tax provision (2,193) (401) (433)
------------ ----------- -----------
Net loss $ (114,850) $ (53,804) $ (29,989)
============ =========== ===========
Loss per share $(1.00) $(0.77) $(0.43)
============ =========== ===========
Weighted average number of shares
outstanding 114,443,695 70,000,140 70,000,140
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
STOCKHORLDERS'
UNREALIZED EQUITY AND
CLASS B ADDITIONAL LOSS ON PARTNERS' PARTNERS'
COMMON COMMON PAID-IN MARKETABLE ACCUMULATED CAPITAL TREASURY CAPITAL
STOCK STOCK CAPITAL SECURITIES DEFICIT (DEFICIT) STOCK (DEFICIT)
------ ----- ------- ---------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Combined balance at
January 1, 1994 $ 2 $ - $ 195,388 $ - $ (10,880) $ 24,631 $ - $ 209,141
Net loss - - - - (22,381) (7,608) - (29,989)
------ ------- ---------- ------ --------- -------- --------- ---------
Combined balance at
December 31, 1994 2 - 195,388 - (33,261) 17,023 - 179,152
Net loss - - - - (32,387) (21,417) - (53,804)
------ ------- ---------- ------ --------- -------- --------- ---------
Combined balance at
December 31, 1995 2 - 195,388 - (65,648) (4,394) - 125,348
Issuance of 27,025,000
shares of Class A Common
Stock, net of issuance
costs of $24.8 million 270 - 407,374 - - - - 407,644
Conversion of and 42,000
to 1 stock split of $1.00
par value Common Stock to
139,250,370 shares of
Class B Common Stock as
part of the Reorganization (2) 1,393 307,828 - (100,514) 4,394 - 213,099
Purchase of 7,975,738
shares of Class B Common
Stock from Continental
Cablevision, Inc. - - - - - - (121,025) (121,025)
Conversion of subordinated
debt to parents plus
accrued interest of
$20.6 million to equity - - 263,602 - - - - 263,602
Issuance of 1,587,791
shares of Class A
Common Stock to purchase
the minority interests
in two Local Market
Partnerships 16 - 22,673 - - - - 22,689
Issuance of 55,609 shares
of Class A Common Stock
upon exercise of options 1 - 387 - - - - 388
Unrealized loss on
marketable securities - - - (25) - - - (25)
Net loss - - - - (114,850) - - (114,850)
------ ------- ---------- ------ --------- -------- --------- ---------
Consolidated balance at
December 31, 1996 $ 287 $ 1,393 $1,197,252 $ (25) $(281,012) $ - $(121,025) $ 796,870
====== ======= ========== ====== ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED COMBINED
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (114,850) $ (53,804) $ (29,989)
Adjustments to reconcile net loss to
net cash provided by operating activities, net of effects of
the Reorganization and acquisitions:
Depreciation and amortization 78,416 37,837 19,933
Amortization of notes costs 1,350 - -
Equity in losses of unconsolidated affiliates 19,400 19,541 11,763
Amortization of deferred credits (2,965) (2,228) (1,886)
Provision for losses on accounts receivable 3,442 877 768
Accretion of discount on Senior Discount Notes 34,567 - -
Minority interest (3,520) ( 663) (1,395)
(Increase) decrease in operating assets and increase
in operating liabilities:
Accounts receivable (18,386) (12,771) (8,958)
Other assets (3,596) (3,108) 592
Accounts payable and accrued liabilities 97,230 45,832 94,472
Deferred credits 2,530 4,628 2,453
---------- --------- ---------
Net cash provided by operating activities 93,618 36,141 87,753
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (294,078) (139,656) (138,892)
Due from related parties (23,042) (6,707) (69,007)
Purchase of minority interest in Teleport Communications Boston - - (36,975)
Purchases of marketable securities, net of sales and maturities (440,831) - -
Purchase of a Local Market Partnership interest (11,618) - -
Capital contributions to Local Market Partnerships prior to
Reorganization (16,435) - -
Investments in and advances to unconsolidated affiliates (127,509) (65,004) (42,342)
Repayment of advances to unconsolidated affiliate - 3,400 -
Reimbursement of funds advanced to unconsolidated affiliates - - 22,190
---------- --------- ---------
Net cash used for investing activities (913,513) (207,967) (265,026)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 162,500 159,000 172,500
Payments on bank revolving credit facility (250,000) - -
Proceeds from Senior Notes 300,000 - -
Proceeds from Senior Discount Notes 625,000 - -
Costs associated with the Offerings (51,867) - -
Proceeds from the issuance of Class A Common Stock 432,400 - -
Proceeds from the exercise of employee stock options 388 - -
Purchase of treasury stock (121,025) - -
Capital contributions from minority partners - 2,168 6,058
Principal payments on capital leases (11,823) (3,480) (459)
Repayments of short-term debt - - (6,542)
---------- --------- ---------
Net cash provided by financing activities 1,085,573 157,688 171,557
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 265,678 (14,138) (5,716)
CASH AND CASH EQUIVALENTS, JANUARY 1 11,862 26,000 31,716
---------- --------- ---------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 277,540 $ 11,862 $ 26,000
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND OPERATIONS
Teleport Communications Group Inc. ("TCG" or the "Company"), the first and
largest competitive local exchange carrier ("CLEC") in the United States,
offers a wide range of telecommunications services in major metropolitan
markets nationwide. TCG competes with incumbent local exchange carriers
("ILECs") as "The Other Local Phone Company"(R) by providing high quality,
integrated telecommunications services, primarily over fiber optic digital
networks, to meet the voice, data and video transmission needs of its
customers. TCG's customers are principally telecommunications-intensive
businesses, hospitals and educational institutions, governmental agencies,
long distance carriers and resellers, Internet service providers, disaster
recovery service providers and wireless communications companies. TCG
offers these customers technologically advanced telecommunications services,
as well as superior customer service, flexible pricing and vendor and route
diversity.
TCG, incorporated in March 1983, and TCG Partners, formed in December
1992, were each owned 30.05994% by wholly-owned subsidiaries of Cox
Communications, Inc. ("Cox"), 29.93994% by wholly-owned subsidiaries of
Tele-Communications, Inc. ("TCI"), 20.00006% by wholly-owned subsidiaries of
Comcast Corporation ("Comcast"), and 20.00006% by wholly-owned subsidiaries
of Continental Cablevision, Inc. ("Continental") (collectively the "Cable
Stockholders") until June 27, 1996.
In connection with the public offerings of Class A Common Stock, Senior
Notes and Senior Discount Notes on June 27, 1996, TCG and its owners entered
into a Reorganization Agreement dated as of April 18, 1996 (the
"Reorganization Agreement"), pursuant to which TCG Partners and certain of
the Company's unconsolidated affiliates became wholly-owned subsidiaries of
TCG, and TCG acquired the minority interests of the owners of the remaining
unconsolidated affiliates.
REORGANIZATION AND OFFERINGS
OFFERINGS
On June 27, 1996, the Company issued 27,025,000 shares of Class A Common
Stock which resulted in gross proceeds of approximately $432.4 million (the
"Stock Offering"), and $300 million of Senior Notes and $1,073 million of
Senior Discount Notes ("the Notes Offerings" and, collectively, with the
Stock Offering, the "Offerings") as part of an initial public offering. The
Offerings of the Senior Notes and the Senior Discount Notes resulted in
aggregate gross proceeds of approximately $925 million. The gross proceeds
of the Offerings (approximately $1.3 billion) were received by TCG on July
2, 1996. TCG also recognized a liability of approximately $46.8 million
which was paid to the Underwriters on July 2, 1996. In July 1996, the
Company utilized a portion of the net proceeds of the Offerings to (i) repay
$250 million of bank indebtedness plus accrued interest and (ii) purchase
7,975,738 shares of Class B Common Stock owned by Continental for $16.00 per
share, less related expenses, for a net cost of $121 million. In addition, a
portion of the proceeds was used to loan approximately $115 million to its
affiliate Comcast CAP of Philadelphia, Inc., ("Comcast CAP"), as part of the
first step in TCG's acquisition of Eastern TeleLogic Corporation. The
remaining funds will be used to expand and develop existing and new
networks, to make acquisitions and for general corporate and working capital
purposes.
REORGANIZATION
Prior to the Offerings, the Company was owned by subsidiaries of
the Cable Stockholders. The business was operated through TCG, and
beginning in 1992, TCG Partners, which is a New York general partnership
owned prior to the Reorganization by the Cable Stockholders in the same
percentages as TCG. TCG Partners was
F-7
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
formed to invest, with TCG, the Cable Stockholders and other cable
operators, in 14 partnerships (the "Local Market Partnerships") to develop
and operate local telecommunications networks. The Local Market Partnerships
were owned by TCG, and/or TCG Partners, certain of the Cable Stockholders
which had cable operations in the particular markets addressed by the Local
Market Partnerships, and, in some cases, other cable operators in such
markets. To simplify this complex ownership structure, the Company and the
Cable Stockholders agreed to consolidate the ownership of TCG Partners and
of the Local Market Partnerships as wholly-owned subsidiaries of TCG. As
part of this process, certain of the other cable operators agreed to sell
their interests in the Local Market Partnerships to TCG directly or through
a Cable Stockholder.
Reorganization Transactions Consummated Prior to or in Connection with the
Offerings
On May 13, 1996, in connection with the Reorganization, TCG purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
In consideration of the transfer by each of the Cable Stockholders of its
respective interests in TCG Partners and the Local Market Partnerships and
the contribution to TCG of $269 million of indebtedness plus accrued
interest from the Cable Stockholders (except that TCI retained $26 million
subordinated note of TCG), the Company issued, immediately prior to the
Offerings, 69,250,230 additional shares of Class B Common Stock to the Cable
Stockholders.
Pursuant to the Reorganization, TCG Partners and the Local Market
Partnerships became wholly-owned subsidiaries of TCG.
Reorganization Transactions After the Offering
On July 2, 1996, TCG issued 576,263 shares of Class A Common Stock
to the unaffiliated minority partners of TCG Detroit in consideration for
the transfer to TCG of the remaining partnership interests in TCG Detroit.
In addition, on December 26, 1996, TCI was issued (i) 638,862 shares of
Class A Common Stock in consideration for the transfer on such date to TCG
of the partnership interest which TCI had acquired from MicroNet, Inc. in
TCG San Francisco and (ii) 372,666 shares of Class A Common Stock in
consideration for the transfer on such date to TCG of the partnership
interest which TCI had acquired from Intermedia Partners in TCG San
Francisco. As a result, as of December 26, 1996, all of the Local Market
Partnerships had become wholly-owned subsidiaries of TCG.
As of December 31, 1996, TCI, Cox, Comcast and Continental owned 37.2%,
29.8%, 19.5% and 13.6%, respectively, of the Company's Class B Common Stock,
representing 36.4%, 29.1%, 19.1% and 13.3%, respectively, of the combined
voting power of the Company's Common Stock. TCG is owned 31.1%, 24.4%,
16.1%, 11.1% and 17.3% by TCI, Cox, Comcast, Continental and public
shareholders, respectively.
F-8
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
Unaudited pro forma financial information for the years ended December 31,
1996 and 1995, as if the Reorganization had occurred at the beginning of
each of the respective years, is as follows:
<TABLE>
<CAPTION>
(In thousands, except share amounts)
1996 1995
---- ----
<S> <C> <C>
Revenues $ 283,383 $ 184,852
------------ ------------
Expenses:
Operating 172,374 112,575
Selling, general and administrative 98,436 71,688
Depreciation and amortization 96,260 62,797
------------ ------------
Total expenses 367,070 247,060
------------ ------------
Operating loss (83,687) (62,208)
Interest:
Interest income 29,163 4,824
Interest expense (66,946) (11,661)
------------ ------------
Total interest (37,783) (6,837)
------------ ------------
Loss before minority interest, equity in
losses of unconsolidated affiliates
and income tax provision (121,470) (69,045)
Minority interest 4,713 3,198
Equity in losses of unconsolidated affiliates (7,650) (1,368)
------------ ------------
Loss before provision for income taxes (124,407) (67,215)
Income tax provision (2,193) (404)
------------ ------------
Net loss $ (126,600) $ (67,619)
============ ============
Loss per share $ (0.86) $ (0.51)
============ ============
Weighted average number of shares
outstanding 146,423,705 132,911,232
============ ============
</TABLE>
Pro forma adjustments include the reversal of TCG's equity in the losses of
13 Local Market Partnerships for 1996 and 1995, as well as amortization of the
goodwill which was recorded upon closing of the transactions and the reduction
of interest expense from the conversion of subordinated debt to parents to
equity. The pro forma financial information presented above is not necessarily
indicative of the operating results which would have been achieved had the
transactions occurred at the beginning of the periods presented or of the
results to be achieved in the future.
F-9
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The 1996 consolidated balance sheet includes the
accounts of TCG and all wholly-owned subsidiaries. The 1996 consolidated
statements of operations and of cash flows include equity in losses of
unconsolidated affiliates for all the Local Market Partnerships through June
30, 1996 except for TCG St. Louis which was consolidated for the year. As of
July 1, 1996, the statements of operations and of cash flows consolidate the
operations of the former Local Market Partnerships. As of December 31, 1995
and for the years ended December 31, 1995 and 1994, the balance sheet and
statements of operations and of cash flows include the combined accounts of
TCG and TCG Partners. Minority interest represents another partner's equity
in TCG St. Louis at December 31, 1995. Investments in which TCG holds less
than a 50 percent interest are accounted for under the equity method. All
material intercompany transactions and balances have been eliminated in the
financial statements presented.
Basis of Accounting - The accompanying financial statements have been
prepared on the accrual basis of accounting.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents - Cash equivalents consist principally of fixed income
securities, U.S. Treasury bills, commercial paper, floating rate notes and
certificates of deposit with a maturity date of three months or less when
purchased.
Marketable Securities - Marketable securities consist principally of fixed
income securities, U.S. Treasury bills, commercial paper, floating rate notes
and certificates of deposit with a maturity date greater than three months
when purchased and are stated at market value. Market value is determined by
the most recently traded price of the security at the balance sheet date.
TCG invests primarily in high-grade marketable securities. All marketable
securities are classified as available for sale securities under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and
unrealized holding gains and losses are reflected as part of stockholders'
equity. Net realized gains and losses are determined on the specific
identification cost method.
Financial Instruments - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash and
cash equivalents, marketable securities and accounts receivable. The
Company places its temporary cash and cash equivalents and marketable
securities with high-quality institutions and, by policy, limits the amount
of credit exposure to any one institution. Concentrations of credit risk
with respect to accounts receivable are limited due to the dispersion of
TCG's customer base among different industries and geographic areas in the
United States, by credit granting policies adopted by TCG and by remedies
provided by terms of contracts, tariffs and statutes.
F-10
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
Fair Value of Financial Instruments - The estimated fair value amounts
have been determined by the Company, using available market information and
appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
Goodwill - Goodwill represents the excess purchase price paid over the net
assets associated with the purchase of the remaining partnership interests
in Teleport Communications (New York), Teleport Communications Boston
("TCB"), TCG Florida, TCG Detroit and TCG San Francisco, as well as goodwill
recorded in the financial statements of TCG Pittsburgh, which is included in
the consolidated financial statements of TCG after the Reorganization.
Goodwill is amortized on a straight line basis over 40, 20 or 15 years for
all entities. The goodwill amortization recorded in 1996, 1995 and 1994 was
$2,150,000, $1,437,000 and $207,000, respectively.
The carrying value of intangible assets is periodically reviewed and
impairments will be recognized when the undiscounted expected future cash
flows, computed after interest expense derived from the related operations,
is less than their carrying value. Effective January 1, 1995, TCG changed
its estimate of the useful life of the goodwill associated with TCB to 20
years. The effect of this change in estimate was to increase depreciation
and amortization expense by approximately $650,000.
Deferred Credits - Deferred credits principally represent advance payments
received from customers for long-term fiber optic service, and are
amortized into income over the life of the related contracts. The current
portions, $2,365,000 and $831,000 at December 31, 1996 and 1995,
respectively, are included in other current liabilities and the non-current
portions, $9,902,000 and $5,392,000 at December 31, 1996 and 1995,
respectively, are included in other liabilities.
Revenue Recognition - Revenue on dedicated line, switch and data services
is recognized in accordance with the terms of the underlying customer
contracts or tariffs and over the period in which the services are provided.
Depreciation and Amortization - Depreciation and amortization are computed
on the straight-line basis over the estimated useful lives of the assets or
the length of the lease, whichever is shorter. Estimated useful lives are
five to 25 years for the communications network and three to five years for
other fixed assets, except for buildings which are 40 years.
When depreciable assets are replaced or retired, the amounts at which such
assets were carried are removed from the respective accounts and charged to
accumulated depreciation and any gains or losses on disposition are
amortized over the remaining original asset lives in accordance with
industry practice.
During 1995, TCG completed a review of the useful lives of its fixed
assets. TCG determined that the lives of certain electronics equipment were
longer than industry standard, while the lives of other electronics
equipment were shorter than industry standard. Therefore, TCG adjusted the
estimated useful lives of certain electronics equipment to conform with
industry standard, effective December 1, 1995. The effect of these changes
in estimate increased depreciation expense for the year ended December 31,
1995 by approximately $700,000.
Impairment of Long-Lived Assets - In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement is effective for fiscal years beginning after December 15, 1995.
Management has
F-11
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
evaluated the effect on its financial condition and results of operations
from the adoption of this statement and does not believe an impairment of
the long-lived assets has occurred.
Income Taxes - TCG accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes," pursuant to which deferred income tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities, using enacted
tax rates currently in effect. State and local taxes are based on factors
other than income.
Net Loss Per Share - Net loss per share is determined by dividing net loss
by the weighted average number of common shares outstanding for the period.
The computation of fully diluted net loss per share was antidilutive in each
of the periods presented; therefore, the amounts reported as primary and
fully diluted are the same.
As part of the Reorganization, TCG declared a 42,000 to one stock split.
All per share amounts and numbers of shares have been restated to reflect
the stock split retroactive for the periods presented.
Presentation - Certain 1995 and 1994 amounts have been reclassified to
conform with the 1996 presentation.
3. ACQUISITIONS AND INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
CERFnet Services Inc.
On February 4, 1997, the Company acquired from General Atomics all the
outstanding capital stock of CERFnet Services, Inc. ("CERFnet"), a leading
regional provider of Internet-related services to businesses, including
dial-up and dedicated Internet access, World Wide Web hosting and
colocation services and Internet training. TCG issued to General Atomics,
CERFnet's former controlling stockholder, 2,100,000 shares of its Class A
Common Stock and granted to General Atomics certain registration rights with
respect to such shares of Class A Common Stock. CERFnet operates a
nationwide backbone network, maintains state-of-the-art Internet server
facilities, has established and maintains direct peering relationships with
other Internet service providers and serves currently over 6,000 customers
located primarily in California and Arizona. TCG expects to upgrade
CERFnet's backbone, to accelerate the expansion of CERFnet's services
nationwide and to achieve marketing synergies by packaging CERFnet's
Internet services with TCG's complementary telecommunications services.
Eastern TeleLogic Corporation
In connection with the issuance of capital stock to Comcast and
Continental in 1993, TCG purchased from Comcast, for approximately $6.5
million, 49% of the issued and outstanding stock of Comcast CAP, which owned
51% of the outstanding capital stock of Eastern TeleLogic Corporation
("ETC"), on a fully-diluted basis. Such purchase price was evidenced by a
note payable in one year from the date thereof with interest at the LIBOR
rate plus .75% per annum and was secured by a pledge to Comcast of the
capital stock of Comcast CAP. On June 30, 1994, this note was repaid in
full.
On August 24, 1994 and September 19, 1994, TCG increased its investment in
Comcast CAP by approximately $3.2 million in the aggregate. These
investments primarily represented TCG's 49% participation in Comcast CAP's
purchase of various issues of ETC's convertible subordinated debt. On
October 3, 1995, ETC converted principal and interest on these notes to
common stock. Such investment is included in investments in and advances to
unconsolidated affiliates in the accompanying balance sheets.
In March and July 1995, TCG and Comcast CAP provided interim financing to
ETC for ETC to expand its network geographically. TCG's portion of the
financing was approximately $3,400,000 in the form of convertible
subordinated demand promissory notes. On October 3, 1995, ETC repaid these
notes plus interest.
F-12
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
Effective as of March 1, 1997, TCG completed its previously announced
acquisition of ETC for 2,757,083 shares of TCG's Class A Common Stock. In
the first of two steps, on October 25, 1996, employees of ETC exercised
their stock options and then ETC redeemed the shares of its stock
(approximately 47%) not held by Comcast CAP. Comcast CAP borrowed at a
market interest rate approximately $115 million from TCG as a short-term
loan and, in turn, loaned this amount to ETC to effect the redemption. In
the second step, TCG acquired Comcast's 51% stock interest in Comcast CAP in
exchange for 2,757,083 shares of the Company's Class A Common Stock,
resulting in ETC becoming a wholly-owned subsidiary of TCG. TCG will assume
approximately $60 million of ETC debt and other obligations. The
acquisition of ETC provides TCG with access to the Philadelphia market, the
nation's fifth largest market, and will allow TCG to establish a contiguous
network between Boston and Washington, D.C.. ETC operates a Class 5 digital
telephone switch on its 525-mile fiber optic network which connects to more
than 360 buildings.
The goodwill recorded with this investment, which represented the excess
of the Company's investment over the underlying net assets of ETC, was
approximately $115,666,000. Such amount is being amortized over 20 years
beginning November 1996 and is reported in the statement of operations in
equity in losses of unconsolidated affiliates. Amortization expense related
to such goodwill for the year ended December 31, 1996 was $964,000.
Unaudited pro forma financial information for the years ended December 31,
1996 and 1995 as if the Reorganization and the acquisitions of ETC and
CERFnet had occurred at the beginning of each of the respective years, is as
follows (in thousands, except share amounts):
1996 1995
---- ----
Revenue $ 316,239 $ 209,904
Net loss $ (152,085) $ (78,561)
Loss per share $ (1.01) $ (0.57)
Weighted average
number of shares
outstanding 151,280,788 137,768,315
Pro forma adjustments include the reversal of TCG's equity in the losses
of the 13 Local Market Partnerships and ETC for 1996 and 1995, as well as
amortization of the goodwill to be recorded upon close of the transaction
and the reduction of interest expense from the conversion of subordinated
debt to parents to equity. It is TCG's intention subsequent to the
acquisition, to more fully evaluate the acquired assets and, as a result,
the allocation of the acquisition costs among the tangible and intangible
assets acquired may change. The pro forma financial information presented
above is not necessarily indicative of the operating results which would
have been achieved had the transactions occurred at the beginning of the
periods presented or of the results to be achieved in the future.
BizTel Communications, Inc.
On February 29, 1996, the Company acquired a minority investment in BizTel
Communications, Inc. ("BizTel") which holds Federal Communications
Commission ("FCC") licenses to provide telecommunications services utilizing
38 GHz digital milliwave transmission in 160 geographic areas, which have a
population of approximately 178 million people, and include more than 80 of
the 100 largest metropolitan markets and all markets where TCG operates.
BizTel also has applications for 84 additional licenses pending FCC approval
in geographic areas which have a population of an additional 55 million
people. BizTel's 38 GHz milliwave services can be used by TCG to
economically connect customers to the Company's fiber optic networks, to
provide network redundancy, diverse routing or quick temporary installations
and to provide stand-alone facilities where the Company does not have fiber
optic networks. On February 28, 1997, TCG obtained an
F-13
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
option, effective July 15, 1997, to acquire the remaining equity interest in
BizTel in exchange for the issuance of 1,667,631 shares of the Company's
Class A Common Stock, to the majority owners of BizTel, who will be granted
certain registration rights with respect to such Class A Common Stock. The
Company also granted a reciprocal option to such majority owners, also
effective July 15, 1997, to put the remaining equity interest in BizTel to
TCG in exchange for the issuance of such shares of Class A Common Stock. The
closing of this purchase is subject to regulatory approvals, including
approval of the FCC.
The goodwill recorded with this investment, which represented the excess
of the Company's investment over the underlying net assets of BizTel, was
approximately $7,378,000. Such amount is being amortized over 20 years
beginning March 1996 and is reported in the statement of operations in
equity in losses of unconsolidated affiliates. Amortization expense related
to such goodwill for the year ended December 31, 1996 was $307,000.
Cox Fibernet Affiliates
Pursuant to the terms of three Operator Managed Ventures Services
Agreements between TCG and certain affiliates of Cox, TCG has options to
acquire up to a 35% interest in the competitive access business conducted by
such affiliates of Cox in New Orleans, Oklahoma City and the Hampton Roads,
Virginia area, respectively. To the extent the Cox competitive access
provider has derived revenue from any contract entered into by TCG as a
result of sales efforts engaged in by TCG on behalf of such Cox operations,
the purchase price shall be the ratio of the annual TCG generated revenue to
total annual revenue of the Cox operation multiplied by the book value of
the assets of the Cox operation. If such ratio is less than 35%, TCG may
purchase the balance, up to 35%, of that Cox operation for the fair market
value (as determined in accordance with the Operator Managed Ventures
Services Agreements) of the operation. There is no cap or maximum purchase
price under the terms of the Operator Managed Ventures Services Agreements.
In November 1996 TCG notified Cox of its intention to exercise its option to
purchase a 35% interest in Cox's Hampton Roads, Virginia operations (the
Company's options to acquire 35% interests in Cox's New Orleans and Oklahoma
City operations do not mature until 1999). Cox and TCG are currently
engaged in discussions concerning the calculation of the purchase price
formula for Hampton Roads, Virginia, and a possible renegotiation and
restructuring of their respective rights and obligations of the parties
under each of the Operator Managed Ventures Services Agreements.
Local Area Telecommunications, Inc.
Effective October 1, 1995, TC Systems, Inc. , a wholly-owned subsidiary of
TCG New York, Inc., entered into an assumption agreement with Local Area
Telecommunications, Inc. ("LOCATE") to acquire certain assets subject to
associated liabilities. Aggregate assets and associated liabilities at that
time were each approximately $2.7 million. TC Systems managed the assets and
funded the associated operating losses until the closing of the transaction,
which occurred on May 31, 1996.
TCG Pittsburgh
During 1995, TCG contributed cash for a 40% partnership interest in
TCG Pittsburgh. TCI held the remaining 60% interest in the Pittsburgh
partnership. In 1996, TCG acquired the remaining interest in TCG Pittsburgh
as part of the Reorganization.
Teleport Communications Boston
On October 24, 1994, TCG paid $6,978,000 to FMR Corp., representing a
return of Fidelity Communications Inc.'s share of TCB's capital calls
received from March 1993 to February 1994, including interest in the amount
of $503,000. On the same date, TCG Partners entered into a purchase
agreement with FMR Corp. to purchase 100% of the capital stock of Fidelity
Communications Inc. In accordance with the purchase agreement, TCG Partners
gave a promissory note in the amount of $30,500,000 to Continental in
consideration of Continental issuing to Fidelity Non-Profit Management
Foundation 62,886 shares of Continental common stock and in exchange for
Fidelity Non-Profit Management Foundation transferring all of the common
stock of Fidelity to TCG Partners.
F-14
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
On November 9, 1994, TCG, on behalf of TCG Partners, paid Continental
$30,605,000 in payment of TCG Partners' promissory note, including interest
of $105,000. TCG Partners' promissory note was canceled on November 15,
1994, and subsequently all security interests of Continental in the stock of
Fidelity Communications Inc. were released.
Summarized Financial Information
Summarized financial information for the Company's investments, which
include BizTel and ETC and six months of the revenues and net losses of the
Local Market Partnerships except for TCG St. Louis as of and for the year
ended December 31, 1996, as well as ETC and the Local Market Partnerships
except for TCG St. Louis as of and for the year ended December 31, 1995, is
as follows (in thousands):
1996 1995
---- ----
Total assets $ 68,053 $501,094
Total liabilities 185,820 151,562
Total revenues 63,940 68,389
Net loss (52,311) (47,408)
4. MARKETABLE SECURITIES
The following is a summary of TCG's marketable securities and cash
equivalents at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Commercial paper $338,390 $ - $ (83) $338,307
U.S. Treasury bills 47,894 33 - 47,927
Federal agency notes 139,481 11 (29) 139,463
Corporate medium term notes 118,825 60 (33) 118,852
Floating rate notes 19,984 16 - 20,000
-------- ----- -------- --------
664,574 120 (145) 664,549
Less: Cash equivalents 223,743 - - 223,743
-------- ----- -------- --------
Marketable securities $440,831 $ 120 $ (145) $440,806
======== ===== ======== ========
</TABLE>
F-15
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
The amortized cost and estimated fair value by maturity date as of December
31, 1996 is as follows (in thousands):
AMORTIZED COST MARKET VALUE
-------------- ------------
Due in one year $ 563,119 $ 563,043
Due after one year
through five years 101,455 101,506
--------- ---------
Total $ 664,574 $ 664,549
========= =========
Proceeds from the sale of investments during 1996 were $664,814,000. Gross
gains of $57,000 and gross losses of $2,000 were realized on these sales in
1996.
5. FIXED ASSETS
The following is a summary of the Company's fixed assets as of December 31,
1996 and 1995 (in thousands):
CONSOLIDATED COMBINED
1996 1995
---- ----
Communications network $ 875,152 $ 381,976
Construction in progress 336,770 110,882
Other 92,307 52,795
---------- ----------
1,304,229 545,653
Less: Accumulated
depreciation and
amortization (236,967) (113,202)
---------- ----------
Fixed assets - net $1,067,262 $ 432,451
========== ==========
6. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS
Long-term debt outstanding as of December 31, 1996 and 1995 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
1996 1995
---- ----
<S> <C> <C>
Subordinated debt to parents, weighted average interest rate
of 6.16% and 6.82%, in 1996 and 1995, respectively
converted to equity in 1996 $ - $269,000
Long-term bank debt, weighted average rate of 6.47% and
6.80% in 1996 and 1995, respectively, repaid July 1, 1996 - 87,500
Senior Notes, 9.875%, due 2006 300,000 -
Senior Discount Notes, net of discount of $414,039,
11.125% due 2007 659,567 -
TCI Note, 7.5% due 2001 27,007 -
-------- --------
Total $986,574 $356,500
======== ========
</TABLE>
F-16
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
Aggregate maturities of long-term debt over the next five years and
thereafter are as follows (in thousands):
2001 - $27,007 and thereafter $959,567.
On June 27, 1996, TCG issued $300 million principal amount of Senior
Notes due 2006 and $1,073 million aggregate principal amount of Senior
Discount Notes due 2007 (collectively the "Notes"). The Senior Notes were
issued pursuant to an indenture (the "Senior Notes Indenture") between TCG
and the United States Trust Company of New York, as trustee, and the Senior
Discount Notes were issued pursuant to an Indenture (the "Senior Discount
Notes Indenture" and, together with the Senior Notes Indenture (the
"Indentures") between the Company and the United States Trust Company of New
York, as trustee. The Indentures contain certain restrictive covenants
which impose limitations on TCG and certain of its subsidiaries' ability to,
among other things: (i) incur additional indebtedness, (ii) pay dividends
or make certain other distributions and investments, (iii) create liens,
(iv) create dividend and other payment restrictions on subsidiaries, (v)
incur certain guarantees, (vi) enter into certain asset sale transactions,
(vii) enter into certain transactions with affiliates (including the Cable
Stockholders) and (viii) merge, consolidate or transfer substantially all of
the Company's assets. Under the terms of the Indentures, TCG currently is
not able to pay dividends.
The Senior Discount Notes were issued at a discount to their aggregate
principal amount to generate gross proceeds of approximately $625 million.
The Senior Discount Notes accrete at a rate of 11.125% compounded semi-
annually, to an aggregate principal amount of $1,073,606,000 by July 1,
2001. Thereafter, interest on the Senior Discount Notes will accrue at the
rate of 11.125% per annum and will be payable semi-annually on January 1 and
July 1, commencing on January 1, 2002; provided that at any time prior to
July 1, 2001, TCG may elect to commence the accrual of cash interest on the
Senior Discount Notes, in which case the outstanding principal amount on
such Notes will be reduced to their accreted value as of the date of such
election and cash interest shall become payable thereafter. The total
interest expense for the Notes was $49,297,000 for the year ended December
31, 1996.
The Notes will be subject to redemption at the option of TCG, in whole or
in part, at any time on or after July 1, 2001, initially at 104.938% of
their principal amount in the case of the Senior Notes, and 105.563% in the
case of the Senior Discount Notes and declining to 100% of their principal
amount on or after July 1, 2004 in the case of the Senior Notes, and July 1,
2004 in the case of the Senior Discount Notes, in all cases plus accrued and
unpaid interest thereon to the applicable redemption date. The incurrence of
long-term indebtedness by TCG is subject to approval by the New York Public
Service Commission (the "NYPSC") and the New Jersey Board of Public
Utilities (the "NJPBU"). In orders issued in 1993, both the NYPSC and NJBPU
authorized TCG to issue long-term debt in amounts not to exceed $1 billion.
Additionally, in 1995, both the NYPSC and NJBPU authorized the Company's
subsidiary, TCG New York, Inc., to incur long-term debt in an amount not to
exceed an additional $1 billion; provided, however, that the NYPSC has
interpreted its authorization as permitting TCG and TCNY, a wholly-owned
subsidiary of TCG, to incur long-term debt not to exceed $1.75 billion in
the aggregate. The Company filed petitions for orders from such state
regulatory authorities to permit TCG to expand TCG's borrowing authority to
$2 billion. Both the New York and New Jersey state regulatory authorities
approved these petitions in the third quarter of 1996.
TCG had a loan agreement with the Cable Stockholders aggregating $349.6
million ($269.0 million outstanding at December 31, 1995. Borrowings bore
interest at 75 basis points above the one- month London Interbank Offered
Rate ("LIBOR"). Total interest expense for this loan was $8,423,000,
$17,643,000 and $5,477,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
In connection with the Offerings, the Cable Stockholders contributed to
TCG $269.0 million aggregate principal amount of indebtedness, plus accrued
interest from May 1995, except that TCI retained a $26 million subordinated
note of TCG, in exchange for Class B Common Stock issued to the Cable
Stockholders. The loan agreement was terminated in connection with the
Reorganization. Interest and principal on the TCI Note are payable in 2001.
F-17
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
On May 22, 1995, TCG entered into a Loan Agreement (the "Revolving Credit
Agreement") with Toronto Dominion (Texas), Inc., as administrative agent,
Chemical Bank, as documentation agent, and the Banks (as defined in the
Revolving Credit Agreement) to finance capital expenditures and working
capital needs of TCG's subsidiaries and of the Local Market Partnerships and
to repay debt of TCG and its subsidiaries to the Cable Stockholders.
Borrowings of $250 million were utilized for the growth of TCG. The $250
million of indebtedness under the Revolving Credit Agreement was repaid in
July 1996 from the proceeds of the Offerings. The total interest expense
for the amounts borrowed under the Revolving Credit Agreement were
$6,264,000, $2,950,000 and $0 for the years ended December 31, 1996, 1995
and 1994, respectively. At December 31, 1996, the amount available under
the Revolving Credit Agreement was $250 million.
The shares of capital stock owned by TCG in certain of the wholly-owned
subsidiaries of TCG (TC New York Holdings I, Inc., TC New York Holdings II,
Inc., TCG Payphones, Inc., and TC Systems, Inc., collectively the
"Restricted Subsidiaries") were and remain pledged as collateral to secure
loans pursuant to, and may not be pledged to any other party under the
terms of, the Revolving Credit Agreement.
In December 1995, the capital stock of the wholly-owned Restricted
Subsidiaries of TCG was transferred, subject to the pledge, to TCG New York,
Inc., a wholly-owned subsidiary of TCG, the stock of which was also pledged
as collateral. TCG New York, Inc. assumed all obligations under the
Revolving Credit Agreement as of the date of transfer. TCG New York, Inc. is
permitted under the terms of the Revolving Credit Agreement to advance funds
to TCG. When made, such advances are to be evidenced by notes from TCG to
TCG New York, Inc. which will be pledged as collateral under the Revolving
Credit Agreement.
The Revolving Credit Agreement contains various covenants and conditions,
including restrictions on additional indebtedness, maintenance of certain
financial ratios and limitations on capital expenditures. None of these
covenants negatively impact TCG's liquidity or capital resources at this
time.
In 1995, TCG entered into interest rate swap agreements to mitigate the
impact of changes in interest rates on its long-term bank debt. At
December 31, 1996 and 1995, TCG had interest rate swaps with commercial
banks with a notional value of $0 and $55,000,000, respectively. The
average fixed interest rate was 5.93 percent in 1995. These agreements
effectively fixed TCG's interest rate exposure on various LIBOR based
floating rate notes (which ranged from 5.87 percent to 5.94 percent).
During July 1996, TCG repaid $250 million of bank indebtedness with the
proceeds of the Offerings. Due to this repayment, TCG is not currently
required under its Revolving Credit Agreement to enter into interest rate
swap arrangements. Accordingly, TCG terminated four interest rate swap
arrangements which were due to mature in 1997, for a gain of approximately
$1.5 million.
The fair value of TCG's long-term debt is estimated based on the quoted
market price for the same or similar issues or on borrowing rates currently
available to TCG for debt with similar terms and maturities. The fair value
of the TCG's long-term debt was $1,082,000,000 and $356,500,000 at December
31, 1996 and 1995, respectively.
7. EMPLOYEE BENEFIT PLANS
Teleport Communications Group Retirement Savings Plan - TCG has a
Retirement Savings Plan (the "Plan") with a 401(k) savings component and a
retirement component covering substantially all eligible employees of TCG
with one or more years of service. Under the 401(k) component of the plan,
participants may make pre-tax contributions and TCG matches 50 percent of
the first 6 percent of annual eligible compensation to a maximum company
contribution of $1,500 per employee. Under the retirement component of the
plan, TCG contributes an amount based on years of service and annual
eligible compensation.
F-18
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
Effective November 1, 1996, the Plan offers TCG's Class A Common Stock as
an investment option. The Plan purchases shares on the open market. As of
December 31, 1996, 36,186 shares, with a total market value of $1,104,000,
had been purchased under the Plan.
In 1996, 1995 and 1994, TCG made matching contributions of $1,092,000,
$736,000 and $456,000, respectively, as required by the 401(k) component
and $1,413,000, $978,000, and $606,000, respectively, under the retirement
component of the plan.
TCG has established a non-qualified, unfunded, deferred compensation Make-
Up Plan of Teleport Communications Group Inc. (the "Make-Up Plan") for the
Teleport Communications Group Inc. Retirement Savings Plan. The purpose of
the Make-Up Plan is to provide certain eligible participants benefits which
would have been payable under the Retirement Savings Plan, but were limited
by the maximum company match of $1,500, as well as compensation limits set
forth by the IRS. Expenses incurred in connection with the Make-Up Plan
were insignificant.
Teleport Communications Group Unit Appreciation Plan - TCG has
established Teleport Communications Group Unit Appreciation Plans (the
"UAP") for 1992 and 1993. During the years ended December 31, 1993 and
1992, TCG made awards of deferred compensation in the form of units (the
"Units"), pursuant to the UAP, to certain eligible employees of TCG.
Benefits under the UAP are equal to the value of the Units on the date the
employee terminates employment or is fully vested in the Units, less the
initial base price of the Units. The initial base price of each Unit as of
January 1, 1993 and 1992 was $34.85 and $30.00, respectively. Each Unit is
equal to 8.4 shares of Class A Common Stock. Except for awards to a certain
employee, the appreciation of any Unit is limited to 200% of the initial
base price. Pursuant to an employee's employment agreement, there is no
limit on the appreciation he may receive under the 1992 UAPs. Awards under
the UAP are subject to a five-year vesting schedule, pursuant to which the
Units granted will be 60% vested as of December 31, 1995 and December 31,
1994, respectively, and fully vested no later than December 31, 1997 and
December 31, 1996, respectively, subject to certain exceptions provided
therein. 1992 UAPs were fully vested December 31, 1996 and were paid early
in 1997. In connection with the UAP, TCG recognized compensation expense of
$1,445,748, $2,474,845, and $6,070,955 for the years ended December 31,
1996, 1995 and 1994, respectively. In January 1996, TCG adopted a plan which
permits the awards under the UAP to be deferred in whole or in part at the
election of the participants for periods of up to five years or, with an
Administrative Committee's consent, until termination of employment.
The following table provides additional information concerning the Unit
Appreciation Plan awards:
<TABLE>
<CAPTION>
Number Number Number Number of
of Units of Units Value of Number of of Units Value Units
Initial Outstanding Vested Units Units Vested of Units Outstanding
Year Number at at Vested at Outstanding at Vested at at
of of December 31, December 31, December 31, at December 31, December 31, December 31, December 31,
Award Units 1996 1996 1996 1995 1995 1995 1994
----- ----- ---- ---- ---- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 36,000 5,300 4,240 $ 295,528 23,700 14,220 $ 991,134 25,100
1992 170,850 63,250 63,250 7,695,373 139,200 111,360 7,486,200 156,850
------- ------ ------ ---------- ------- ------- ---------- -------
Total 206,850 68,550 67,470 $7,990,901 162,900 125,580 $8,477,334 181,950
======= ====== ====== ========== ======= ======= ========== =======
</TABLE>
F-19
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
Teleport Communications Group Inc. 1996 Equity Incentive Plan -TCG
established the Teleport Communications Group Inc. 1996 Equity Incentive
Plan (the "Equity Incentive Plan") effective June 27, 1996, to provide
opportunities for certain employees of TCG to participate in the
appreciation in the value of TCG after the initial public offering. The
Board of Directors authorized the issuance of up to 637,792 shares of Class
A Common Stock under the Equity Incentive Plan. The Equity Incentive Plan
is administered by the Compensation Committee which has full and
discretionary power to award shares under the Equity Incentive Plan.
Under the Equity Incentive Plan, each employee who had an award under the
1992 UAP or the 1993 UAP, whether or not the employee had elected to defer
receipt of the payment of benefits thereunder and who is employed by TCG as
of June 27, 1996, had the right to waive his interest in all or any portion
of the employee's benefit in the 1992 UAP or 1993 UAP. In exchange
therefore, the employee was granted a number of shares under the Equity
Incentive Plan equal to the value of the portion of the employee's benefit
waived (determined as of June 27, 1996) multiplied by 120% and divided by
the initial public offering price per share of Class A Common Stock. No
employee could receive more than 54,000 shares under the Equity Incentive
Plan, and a certain employee was not eligible to participate. A share under
the Equity Incentive Plan is equivalent in value to one share of Class A
Common Stock. Thus, the value of the benefit payable under the Equity
Incentive Plan will fluctuate in accordance with the fair market value of
the Class A Common Stock.
Shares under the Equity Incentive Plan granted in exchange for 1992 UAP
benefits are subject to a two-year vesting schedule, with 70% of the shares
becoming vested as of June 27, 1997 and the remaining 30% becoming vested as
of the June 28, 1998. Shares granted in exchange for the 1993 UAP benefits
are subject to a three-year vesting schedule, with 70% of the shares
becoming vested as of June 27, 1998 and the remaining 30% becoming vested as
of June 27, 1999. A participant shall become 100% vested in his shares in
the event of death, total disability or a change in control. In the event a
participant's employment is terminated for cause, his interest in each and
every share awarded under the Equity Incentive Plan shall be forfeited.
Shares under the Equity Incentive Plan will be paid to a participant
either in one lump sum cash payment or in shares of Class A Common Stock, as
determined at the discretion of the Compensation Committee, on the payment
date elected by the participant at the time he elects to participate in the
Equity Incentive Plan. In general, the payment date elected may be the last
business day of any calendar quarter during the period commencing June 30,
1998 and ending June 30, 2001.
At December 31, 1996, 421,233 shares were outstanding under the Equity
Incentive Plan.
Teleport Communications Group Inc. Stock Option Plan - TCG established
the Teleport Communications Group Stock Option Plan (the "SOP") effective
September 26, 1993. The SOP is administered at the discretion of the
Compensation Committee, which has made long-term incentive compensation
awards in the form of non-qualified and incentive stock options to eligible
employees. Stock options were granted with exercise prices at or above the
fair market value of the shares on the date of grant, and no compensation
expense has been recognized in connection with the options. The
Compensation Committee may permit the exercise price to be paid in cash,
through delivery of other shares of Class A Common Stock, by delivering
irrevocable instructions to a financial institution to deliver promptly to
TCG the portion of sale or loan proceeds sufficient to pay the exercise
price, or through an election to have shares withheld from the shares
otherwise to be received by the option holder.
F-20
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
<TABLE>
<CAPTION>
Shares of Common Stock
----------------------
Available for Weighted Avg.
Grant Outstanding Exercise Price
----- ----------- --------------
<S> <C> <C> <C>
Balance, January 1, 1994 2,990,757 2,392,593 $ 6.90 - 7.84
Authorized - - -
Granted (324,026) 324,026 10.39
Exercised - - -
Forfeited 221,315 (221,315) 6.90 - 10.39
--------- ---------
Balance, December 31, 1994 2,888,046 2,495,304 $ 6.90 - 10.39
Authorized - - -
Granted (285,096) 285,096 14.22
Exercised - (27,115) 6.90
Forfeited 215,225 (215,225) 6.90 - 14.22
--------- ---------
Balance, December 31, 1995 2,818,175 2,538,060 $ 6.90 - 14.22
Authorized 5,547,683 - -
Granted (2,003,462) 2,003,462 17.46 - 21.60
Exercised - (55,355) 6.90
Forfeited 173,443 (173,443) 6.90 - 21.60
--------- ---------
Balance, December 31, 1996 6,535,839 4,312,724 $ 6.90 - 21.60
========= =========
</TABLE>
Teleport Communications Group Inc. Employee Stock Purchase Plan - TCG
adopted the Teleport Communications Group Inc. Employee Stock Purchase Plan
("the Stock Purchase Plan"), effective June 27, 1996. The Stock Purchase
Plan is administered by the Compensation Committee. Each eligible employee
was given an option to purchase a number of shares of Class A Common Stock
up to 10% of such employee's compensation plus bonus paid for the calendar
year preceding the year the option is awarded, divided by the purchase price
per share under the option. No employee can receive options for more than
$25,000 worth of shares in any calendar year. The purchase price for one
share of Class A Common Stock is 15% below the initial offering price of
$16, or $13.60. The Board of Directors has authorized the issuance of
745,000 shares under the Stock Purchase Plan. The options expire on June
27, 1997. Options related to 623,894 shares of Class A Common Stock were
issued. The expense recorded for the six months ended December 31, 1996
related to the options issued was approximately $699,000.
<TABLE>
<CAPTION>
Shares of Common Stock
----------------------
Available for Weighted Avg.
Grant Outstanding Exercise Price
----- ----------- --------------
<S> <C> <C> <C>
Balance, January 1, 1996 - - $ -
Authorized 745,000 - 13.60
Granted (623,894) 623,894 13.60
Exercised - - -
Forfeited 41,001 (41,001) 13.60
-------- -------
Balance, December 31, 1996 162,107 582,893 $ 13.60
======== =======
</TABLE>
Stock Based Compensation - In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation" which encourages but does not
require companies to record compensation cost for stock based compensation
plans at fair value.
F-21
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
TCG has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25 "Accounting for Stock Issued to Employees," and its related
interpretations. Accordingly, no compensation expense has been recorded for
its stock awards and employee stock purchase plan, but rather, the Company
has determined the pro forma net loss and net loss per share amounts for 1996
and 1995, as if compensation expense had been recorded for options granted
during those years under the fair value method described in the statement.
Compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. Compensation cost for
stock appreciation rights and performance equity units is recorded quarterly
based on the quoted market price of TCG's stock at the end of the period.
The Company utilized the Black-Scholes option pricing model to estimate
the fair value at the date of grant of options granted during 1996 and 1995.
Under the Black-Scholes model, a volatility factor of approximately 0.25 was
used for options granted on or after the date of the Offerings and the
minimum value method was used for options granted prior to the date of the
Offerings, as if there was no market for the Company's common stock in which
to monitor stock price volatility. Had TCG adopted SFAS No. 123, net loss and
loss per share would have increased the reported results as indicated below
(in thousands, except share amounts):
1996 1995
---- ----
Net loss - as reported $ 114,850 $ 53,804
============ ===========
Net loss - pro forma $ 116,398 $ 53,929
============ ===========
Loss per share - as reported $ (1.00) $ (.77)
============ ===========
Loss per share - pro forma $ (1.02) $ (.77)
============ ===========
Weighted average number of
shares outstanding 114,443,695 70,000,140
============ ===========
Valuation Assumptions - The fair value of options at the date of grant
was established using the Black-Scholes model with the following weighted
average input assumptions:
<TABLE>
<CAPTION> RISK FREE ANNUAL
EXPECTED EXERCISE STOCK PRICE AT INT. DIV. FORFEITURE
LIFE PRICE GRANT VOLATILITY RATE YIELD RATE
---- ----- ----- ---------- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
1996 Employee Stock
Purchase Plan Grants 1.00 $13.60 $16.00 25.0% 5.81% 0% 4.89%
1995 and 1996 Stock 5.04 to $14.22 to $14.22 to .1 to 6.66% to 3.53% to
Option Grants 5.59 $33.63 $33.63 25.0% 6.73% 0% 4.90%
</TABLE>
F-22
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
The following table summarizes information concerning the remaining options
outstanding as of 1996 for the 1995 and 1996 option grants:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
----------------------------------- -----------------------------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE NUMBER OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE PRICES EXERCISABLE PRICES
------ ----------- ---- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
1996 Employee
Stock Purchase
Plan Grants $13.60 582,893 1 $13.60 - -
1995 and 1996
Stock Option $14.22 to 5.04 to $14.22 to
Grants $ 33.63 2,204,874 5.59 $21.60 1,156 $14.22
</TABLE>
Employment Agreements - TCG has employment agreements with certain of its
executive officers and senior management personnel. These agreements are
effective through dates ending from June 30, 1998 to December 31, 1999,
unless terminated earlier by the executive or TCG, and provide for annual
salaries, cost-of-living adjustments, additional compensation in the form of
bonuses based on the performance of TCG and the executive, and participation
in the various benefit plans of TCG. The agreements contain certain
benefits to the executive if TCG terminates the executive's employment
without cause or if the executive terminated his employment as a result of
change in ownership of TCG. The salary and bonus expense related to these
executives for the years ended December 31, 1996 and 1995 approximated
$2,873,000, and $2,133,000, respectively. TCG's remaining aggregate
commitments for salaries under such agreements is approximately $4,903,000.
The commitments for bonuses under these agreements is approximately
$1,793,048.
In the event TCG terminates the executive without cause or the executive
terminates his/her employment as a result of a change in control, the
agreements provide for continued vesting in deferred compensation and long
term incentive awards as well as the payment of a base salary for each
executive plus an annual bonus for the duration of the agreement. The
annual bonus is an amount not less than 30% of such base salary, except for
a certain employee whose minimum annual bonus is 50% of base salary. Each
executive is entitled to these severance benefits for at least six months
following such termination, except for a certain employee whose minimum
entitlement period is 30 months.
F-23
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
8. INCOME TAXES
There are no current income taxes payable based on TCG's operating loss.
The current state and local tax expense are based on factors other than
income. The following temporary differences compose the net deferred income
tax payable (in thousands):
1996 1995
Deferred income tax
liabilities -
depreciation,
amortization and
excess credits $ 43,072 $ 23,294
-------- --------
Deferred income tax assets:
Deferred revenue (2,361) (2,089)
Assets recorded for tax purposes (3,368) (1,301)
Incentive compensation (4,579) (3,303)
Operating loss (81,578) (35,233)
Equity on investments (138) (710)
-------- --------
(92,024) (42,636)
Less valuation allowance 49,874 20,264
-------- --------
Total deferred tax assets (42,150) (22,372)
-------- --------
Deferred income taxes
payable - net $ 922 $ 922
======== ========
In 1996, 1995 and 1994, the net income tax benefits of approximately
$29,610,000, $10,909,000 and $7,782,000, respectively, have been offset by
increases in the valuation allowance of $29,610,000, $10,909,000 and
$7,782,000 respectively, due to the uncertainty of realizing the benefit of
the loss carry- forwards.
At December 31, 1996, TCG had operating loss carry-forwards for tax
purposes of approximately $170,500,000, expiring principally in 2009 through
2012.
F-24
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
A reconciliation of the statutory federal income tax rate and TCG's
effective income tax rate is as follows:
1996 1995 1994
Statutory federal income tax rate 35.00% 35.00% 35.00%
State and local taxes,
less federal benefit 2.36 1.30 2.00
Unutilized tax benefit due
to net operating loss (31.80) (33.30) (35.50)
Permanent differences and other (3.20) (1.70) 0.50
------ ------ ------
Effective rate 2.36% 1.30% 2.00%
====== ====== ======
9. RELATED PARTY TRANSACTIONS
In connection with the management of its previously unconsolidated
partnerships, TCG entered into management services agreements. Under the
terms of such agreements, TCG provided certain operating and administrative
services to such entities, for which it earned management fees. Management
fees earned were approximately $21,828,000, $29,638,000, and $19,403,000 in
1996, 1995 and 1994, respectively. After June 27, 1996, such management fee
revenue is no longer recorded because the previously unconsolidated
partnerships are now consolidated.
In 1996 TCG entered into a preliminary, short-term agreement with TCI
which provides for the provision of certain services by TCG to TCI in
connection with the development by TCI of residential telephony service
offerings in Hartford, Connecticut, San Francisco, California and Arlington
Heights, Illinois and possibly other locations. TCI has agreed to reimburse
TCG for certain costs and cost of capital in connection with these services.
TCI and TCG are in the process of negotiating a definitive agreement
regarding the provision of these services. TCG has also entered into or is
negotiating agreements with each of the other three Cable Stockholders
regarding the provision of services with respect to the offering of
residential telephony services by such Cable Stockholders to individual
multiple dwelling units. At December 31, 1996 and 1995, the amounts due to
TCG for this reimbursement were $1,057,000 and $461,000, respectively, and
is included in accounts receivable - related parties.
TCG also provides management services to certain affiliates of Cox under
three Operator Managed Ventures Services Agreements, including billing
services, network monitoring and accounts receivable functions. Under the
terms of the agreements, TCG retains eight percent of the collected revenues
from Cox customers as a royalty fee. Royalty fees recorded from Cox were
approximately $318,000, $98,000, and $27,000 for the years ended December
31, 1996, 1995 and 1994, respectively and are included in management and
royalty fees from affiliates in the statements of operations. Included in
accounts receivable - trade are approximately $436,000 and $262,000 at
December 31, 1996 and 1995, respectively, for amounts owed by Cox customers.
At December 31, 1996 and 1995, the amounts due to Cox affiliates under the
agreements were $1,079,000 and $295,000, respectively.
In 1996 and 1995, TCG purchased cable on behalf of certain of its owners,
which it then sold to them at cost. The amount receivable from the owners
was $1,496,000 and $3,683,000 as of December 31, 1996 and 1995,
respectively.
F-25
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
Sprint Spectrum, a partnership owned 60% by TCI, Comcast and Cox, has
entered into preliminary agreements or letters of intent with a number of
wholly-owned subsidiaries of TCG providing for the construction of special
facilities and the provision of services to Sprint Spectrum by TCG. TCG and
Sprint Spectrum are in the process of negotiating a national master service
agreement. The amount receivable from Sprint Spectrum at December 31, 1996
was $345,000.
Revenues earned from all services to the other partner of TCB and its
affiliates were approximately $3,709,000 for the year ended December 31,
1994.
10. COMMITMENTS AND CONTINGENCIES
Under the terms of contracts with various parties, TCG is obligated to pay
franchise fees, office rents, node rents and rights-of-way fees in
connection with its fiber optic network through 2022. These contracts
provide for certain scheduled increases and for possible escalation of basic
rentals based on a change in the cost of living or on other factors. TCG
expects to enter into other contracts for additional franchise fees, office
rents, node rents, rights-of-way, facilities, equipment, and maintenance
services in the future.
A summary of such fixed commitments at December 31, 1996 is as follows (in
thousands):
YEARS AMOUNT
1997 $ 25,331
1998 23,564
1999 22,892
2000 21,914
2001 20,252
Thereafter 63,638
---------
Total $ 177,591
=========
Rent expense under operating leases was approximately $18,044,000,
$11,770,000 and $11,185,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
F-26
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
Communications network includes assets acquired under capital leases of
approximately $114,126,000 and $22,430,000 (including approximately
$95,980,000, and $16,615,000 with related parties) at December 31, 1996, and
1995, respectively. The related accumulated depreciation and amortization
was approximately $12,080,000 and $1,085,000, respectively.
The following is a schedule, by year, of future minimum payments under the
leases, together with the present value of the net minimum payments as of
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
<S> <C> <C>
1997 $29,508
1998 19,683
1999 12,270
2000 4,719
2001 548
Thereafter 3,834
-------
Total minimum lease payments 70,562
Less amount representing interest 12,010
-------
Total obligations under capital leases $58,552
=======
</TABLE>
Teleport Communications is subject to a revenue sharing agreement with The
Port Authority of New York and New Jersey (the "Port Authority"). Based on
the agreement, Teleport Communications is obligated to pay to the Port
Authority five percent of its gross revenues, and may be required to pay a
"net return rental fee," as defined, to the extent its cumulative net return
exceeds the entitlement amount. Teleport Communications is also required to
remit to the Port Authority a minimum payment currently equal to $300,000
annually.
Teleport Communications entered into a 15-year franchise agreement with
the City of New York during 1994, which among other things, requires a
payment based on certain gross revenues, as defined in the agreement. The
franchise provides for the payment of 10% of certain gross revenues in 1995
and 1996, 6% in 1997 and 5% thereafter, all subject to certain setoffs,
reductions and adjustments. The franchise also provides that commencing with
calendar year 1995, payment to the City will be no less than $200,000 per
year.
In the ordinary course of business, TCG is involved in various litigation
and regulatory matters, proceedings and claims. In the opinion of TCG's
management, after consultation with counsel, the outcome of such proceedings
will not have a materially adverse effect on TCG's financial position,
results of operations or cash flows.
F-27
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - CONTINUED
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest and non-cash investing and financing activities for
the years ended December 31, 1996, 1995 and 1994 were as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash paid during the year for interest $ 7,818 $ 8,675 $ 5,693
======== ======= =======
Fixed assets acquired under capital leases $ 14,034 $15,151 $ 4,384
======== ======= =======
Right of way obtained in exchange for cable installation $ - $ 1,330 $ -
======== ======= =======
Conversion of subordinated debt to parents plus accrued
interest $263,602 $ - $ -
======== ======= =======
Conversion and stock split of $1 par value common
stock to 139,250,370 shares of Class B Common Stock
as part of the Reorganization $213,099 $ - $ -
======== ======= =======
</TABLE>
12. SELECTED QUARTERLY INFORMATION (UNAUDITED)
Summarized below is quarterly financial information for the years ended
December 31, 1996 and 1995 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
1996 COMBINED COMBINED CONSOLIDATED CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Revenues $ 50,435 $ 57,087 $ 72,749 $ 87,398 $ 267,669
Net loss (18,693) (19,743) (33,705) (42,709) (114,850)
Loss per common share $ (0.25) $ (0.27) $ (0.21) $ (0.27) $ (1.00)
1995 COMBINED COMBINED COMBINED COMBINED TOTAL
Revenues $ 36,792 $ 38,847 $ 42,349 $ 48,181 $ 166,169
Net loss (11,540) (11,705) (12,672) (17,887) (53,804)
Loss per common share $ (0.16) $ (0.17) $ (0.18) $ (0.26) $ (0.77)
</TABLE>
* * * * * *
F-28
